EXHANGE RATE CRISIS: RUSSIA VERSUS SOUTH KOREA.

Russia and South Korea experienced exchange rate crises in the late 1990s, but their response was markedly different. First, Russia experienced a dramatic decrease in the value of the Russian ruble relative to the U.S. dollar in 1998. The Russian government responded by suspending payments on foreign debt. Similarly, South Korea experienced a decrease in the value of the won in 1997. In contrast, South Korea did not default on its debt. Why might these two countries have behaved differently in response to their respective crises? What are the benefits of default? What are the drawbacks?

Running head: EXCHANGE RATE CRISIS: RUSSIA VERSUS SOUTH KOREA
Exchange Rate Crisis: Russia Versus South Korea
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1EXHANGE RATE CRISIS: RUSSIA VERSUS SOUTH KOREA
Russia
The Russian Government could not implement well-functioning economic reforms to tackle the
financial crisis of 1998 (Klapper, Lusardi & Panos,2013). Investors lost confidence and sold
rubles, making them further lose value. The country’s Central Bank was forced to expend its
foreign reserves in order to defend domestic currency, making Russia resort to default on its
foreign debt.
South Korea
To deal with the financial crisis of 1997, South Korea stabilized its currency market. The IMF
introduced a tight monetary policy. Korea prevented a worsening of its financial situation by
limiting its credit to the private sector (Pyo, 2018). Major Korean banks were nationalized.
Another reason that prevented South Korea from defaulting on its debt was diversification of its
funding sources.
Benefit and Drawback
The default made Russian investors aware of the importance of portfolio diversification. The
major drawbacks were severe financial losses in the banking sector, political crisis and extreme
economic turmoil.

2EXHANGE RATE CRISIS: RUSSIA VERSUS SOUTH KOREA
References
Klapper, L., Lusardi, A., & Panos, G. A. (2013). Financial literacy and its consequences:
Evidence from Russia during the financial crisis. Journal of Banking & Finance, 37(10),
3904-3923.
Pyo, H. K. (2018). The Financial Crisis in South Korea: Anatomy and Policy Imperatives.
In Asian Contagion (pp. 151-169). Routledge.