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Proactive action needed in response to Russia’s default crisis

Proactive action needed in response to Russia’s default crisis

Posted December. 18, 2014 05:48,   


A sovereign default is a possibility in Russia due to the dramatic fall of the country’s ruble. The value of the Russian currency soared to 80 rubles against the U.S. dollar, hitting a record high in 16 years since the moratorium in 1998. Despite the hike in the benchmark interest rate from 10.5 percent to 17 percent on Monday, the ruble kept falling sharply. To make matters worse, Washington is putting more pressure on Russia by placing additional economic sanctions against Russia and strengthening military support to Ukraine.

Russia’s economic crisis has a complicated political and economic background. One of the factors was the sharp fall of global oil prices, which was triggered by the development of shale gas in the U.S. and crude oil prices lowered by the OPEC. When oil prices fell from around 100 dollars to around 50 dollars in six months, the Russian economy heavily dependent on oil has been hit hard. It was hit harder when the U.S. and the EU put economic sanctions against Russia when it annexed Crimea in April. Despite the falling ruble, the Russian Central Bank minted money to save Rosneft, Russia’s state-run oil producer, only to lose the market’s confidence.

A financial crisis in Russia would have a negative impact on other countries. As the U.S. plans to raise the interest rate, the strong dollar led to the outflow of funds from emerging economies, which increases concerns over another financial crisis. The weak links are Venezuela, Indonesia, Brazil and Turkey. Korea does not need to worry about this now because it has only two percent trade exposure to Russia and does not show an unusual sign when capital fled emerging markets last year. However, it is hard to predict how the ruble crisis will develop. The Korean government and the central bank should closely monitor the development and take a proactive action.

Russian President Vladimir Putin banned the import of agricultural products from the U.S. and Europe as a countermeasure, but the western countries will not easily take a step back. “The Russian economy is Putin’s hands,” White House spokesman Josh Earnest said on Tuesday that if Moscow shows willingness to comply with international law, the U.S. will ease sanctions and pressure. Although Putin won support under the slogan of "strong Russia," his political standing would be threatened if the Russian economy collapses. Rather than staying complacent, Korea should pass the bills on economic revitalization that are pending in the National Assembly to revive the stalled economy.