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Analysis & Opinion
27.03.09 Russia Profile Weekly Experts Panel: Moscow’s Plan To Save The World
Introduced by Vladimir Frolov

Contributors: Vladimir Belaeff, Stephen Blank, Vlad Ivanenko

On March 16 Russia unveiled its plans for sweeping global financial reforms designed to weaken the American dominance and overhaul the "obsolescent" world economic order of the past. In a six-page document addressed to the upcoming G20 summit in London, the Kremlin said that the current global economic downturn was the result of a "collapse of the existing financial system," due to poor management and basic inadequacy. Is the Russian plan to save global finances feasible? What kind of response is Moscow likely to get for these bold ideas at the G20 summit in London? How will the Obama administration react to it?

The current crisis “has demonstrated the need to abandon traditional approaches and adopt collective and internationally agreed decisions essentially aimed at developing a globalization process management system,” said the document. Moscow outlined five principles on which a "new international financial architecture" should be based, and offered concrete proposals in eight specific areas for the G20 to consider. These include a reform of the international monetary and financial system, a reform of the system's institutions, and tightened international regulation and financial supervision.

The Kremlin said the London summit should agree on the "parameters" of a new global financial system, but should be followed by an international conference to adopt conventions on new global financial regulations. "The system of collective decision making can become efficient only when it is legitimated, i.e. it represents the interests of a wide range of participants. The obsolescent unipolar world economic order should be replaced by a system based on the interaction of several major centers," the report claimed.

Moscow’s plan contains many ideas that would upset the United States. "Greater transparency of the countries issuing reserve currencies when they conduct their monetary policy is of fundamental importance," the Kremlin warned just two days before the Federal Reserve announced its decision to purchase the U.S. government bonds and other public and private debt securities directly, in order to pump unlimited liquidity into the U.S. and global financial system – a move that sent the U.S. dollar plunging against major currencies, including the Russian ruble.

Russia has proposed reviewing the role and the mandate of the International Monetary Fund (IMF) and boosting its resources. "We believe that the total financial resources available to the Fund must be adequate for it to perform its creditor functions. We also consider it necessary to draw up new credit mechanisms, making it possible to provide assistance to countries experiencing financial difficulty."

Russia has also put forward a proposal to have the IMF examine the possibility of creating a supra-national reserve currency, and also forcing national banks and international financial institutions to diversify their foreign currency reserves. "We believe it is necessary to consider the IMF's role in this process and also to define the possibility and the need to adopt measures allowing for Special Drawing Rights (SDRs) to become an internationally recognized super-reserve currency," the Russian document said.

Is the Russian plan to save global finances feasible? Many observers in Russia ridiculed the proposals as good PR – they sound good on paper but are almost impossible to implement on a global level. Many criticized the idea of creating a new supra-national reserve currency to decrease the world’s dependence on the U.S. dollar as one out of the realm of fantasy. But is it really so far-fetched? What kind of response is Moscow likely to get for these bold ideas at the G20 summit in London? How will the Obama administration react to this? How will the BRIC nations react to Russia’s proposals?

Vlad Ivanenko, Ph.D., Economist, Ottawa:

In light of the response that Nathanael received years ago on “Can anything good come out of Nazareth?” I refrain from brushing the latest Russian proposal aside on the ground that it comes from the “wrong” place, and assess its merits instead. From my point of view, it promotes two objectives.

The first, more obvious purpose of the plan is to intensify the discussion on the need to redesign the global financial system. Here, Russia proposes three interconnected innovations: it wants to define the uniform global rules of national macroeconomic policies, the uniform rules of financial and banking regulation, and to reform the international monetary system. The proposal envisages the appearance of one or several supranational bodies with effective powers to discipline the national transgressors and to issue an international currency that is supposed to replace the set of national currencies currently used in international transactions.

The second, more subtle statement about the importance of domestic demand for growth is consistent with Moscow’s vision of a “multi-polar world.” The choice of the model of growth depends on a nation’s global aspirations. Countries that strive to be active players on the global arena emphasize the importance of domestic initiatives and, hence, drive up demand at home. Other states do not desire to take the risks that leadership entails, and choose to serve foreign demand through export promotion. Obviously, Russia sees itself as belonging to the first category.

I do not see any logical faults with the Russian proposals. It is generally agreed that the current financial crisis has exposed weaknesses in the global economic system. There is awareness that it cannot be contained without increased coordination among national players. Thus, it is natural that the debates on the future of the global financial architecture take place.

A warning is in order. Low-intensity debates on the IMF reform and the need to improve international banking regulation, known as Basel II, have been discernible since at least the beginning of the millennium. However, they have brought almost nothing but frustration, partially because of the U.S. government’s attempts – generally supported by the EU – to preserve the status quo. One could add the collapse of the Doha Round of trade negotiations to the list of failures.

The resulting situation is of an impasse, but the unfolding of the crisis appears to tip the balance in favor of countries not directly aligned with the United States. The failure of the U.S. Treasury to find non-inflationary sources to finance its budgetary deficit scares the foreign holders of dollar-denominated assets. As a result, China expresses tacit support for the proposal to create an international reserve currency, while oil-exporting countries debate how they can hedge against a sharp depreciation of the dollar.

In this situation, the Russian activism should not be seen as a deliberate attempt to humiliate President Barack Obama, but as a pragmatic move aimed at capitalizing on the present situation, which is unfavorable for the United States. For some time Russia has been increasingly vocal in global financial affairs, expressing displeasure with its subordinate status, inconsistent with its growing financial might. One could recall how Moscow tried to persuade, unsuccessfully, the IMF shareholders to accept its candidature – a former Czech central banker – for the post of IMF chair in August of 2007, on the grounds that the IMF was not up to the job to handle possible crises with Dominique Strauss-Kahn at the helm. I would bet that this time it will fail again, but in terms of creating publicity, I venture to say that Moscow steadily gains global political capital with a proposal like this.

Professor Stephen Blank, the U.S. Army War College, Carlyle Barracks, PA:

I expect the London G20 conference to achieve very little because of the already visible gaps between the Anglo-American approach and that of France and Germany. In this respect it may resemble its 1933 predecessor, which would be unfortunate. As for Russia's proposals, the fundamental problem is that they are so self-serving, and Russia’s policies contradict them so much, that they will not and cannot be taken seriously.

Russia's management of its finances was no better than that of the George Bush administration. The right to property and the sanctity of contract, the pillar on which all transactions rest, does not exist in Russia, and I would thus take issue with those who think that Russia has a capitalist economy. While markets may exist in such a system, Russia does not have a market, and this fact disqualifies it from serving as a major financial player, since nobody can trust its policies or predict them with any certainty.

Secondly, its proposals are so blatantly anti-American as again to be disqualified from serious consideration. They are pretty much the same ideas Dmitry Medvedev advanced before the crash, and the same medicine cannot be good for people both before and after a calamity.

Thirdly, Russia lacks the resources to play this role - another sign of a characteristic failing of its policy, an overestimation of Russia's real power and deserved status. Economists will tell us that the technical difficulties, not to mention the political ones, in implementing these ideas also render them hors de concours, making it quite unlikely that Russia will attain any of the goals laid out in its program. Finally, when a government as corrupt and opaque as Russia's starts calling upon others to show greater transparency and subordinate their sovereignty to an institution that Russia will not accept as having the authority to regulate its economy, it becomes obvious that these proposals were advanced as much for propaganda reasons as for any others, and therefore do not merit serious consideration.

Vladimir Belaeff, President, Global Society Institute, United States:

In my opinion, Russia's proposal is not "designed to weaken U.S. dominance."

Diplomatic politesse notwithstanding, internationally, the cruel truth is known that the global economic crisis ignited in the United States, and was preventable if American regulatory mechanisms had not been intentionally gutted over the past few decades. If the U.S. financial system and its managers see themselves as global economic leaders, they will also pay the price for the global consequences of the reckless lack of financial markets governance inside the United States.

The gradual dismantling of regulation and the eventual de facto abrogation of anti-speculative provisions of the Glass-Steagall Act (1933) were done for internal American reasons, pushed by lobbying efforts of the U.S. financial industry. This deregulation was done without concern for its impact on the rest of the world. A presumption for global financial primacy was accompanied by parochial policies.

Thus, the "U.S. dominance" has been weakened, not by forces external to the United States, but by reckless and doctrinaire policies within Washington itself. And now Alan Greenspan himself has recanted his faith in "market self-regulation."

To declare that Russia's proposal is aimed at the United States is a non sequitur. Russia is a major creditor of the United States: Russia's position in U.S. debt issues is seventh in the world, at an estimated value of $130 billion. Like China, Russia cannot be interested in eroding its investment in the United States, and wants to protect it.

Secondly, the proposal, which reflects concepts voiced by international experts, is designed to apply to all countries, including Russia and China themselves. It is an egalitarian approach. If this "diminishes" U.S. significance, then it logically follows that the United States is currently enjoying a position of privilege in global financial markets, and from that aspect arises the challenge of whether such privilege is justified, in view of the American locus of the crisis, the ongoing scandals such as unexamined $65 billion pyramid schemes (Bernard Madoff) and the multi-million dollar bonuses paid with U.S. taxpayer money (AIG.) Note that in the United States, derivatives trading and hedge funds are still unregulated.

The United States is the largest debtor nation in the world. The total U.S. debt burden is estimated at 70 percent of its annual GDP (or more, according to some.) Globally, there is no appetite to be dragged down into the ditch of economic recession by an "economic locomotive" which is not properly steered and burns borrowed fuel. The concepts in Russia's proposal are echoed in other countries, notably China, and the UK, where the prime minister has repeatedly voiced the requirement for global banking transparency.

I think that structural change in the global financial governance is inevitable. I believe that no one wishes to undermine the United States economically - America is "too big to fail." But 25 percent of the world annual GDP attributed to America, though large, is not paramount. The countries that contribute the remaining 75 percent will want their interests embedded in a structure that prevents the repetition of the current crisis, which was truly preventable through effective regulation, transparency and prudent governance.

Actually, a reasonable implementation of a system like the one proposed by Russia could relieve much of the pressure on the beleaguered American economy, and thus help the U.S. taxpayers and businesses. Unfortunately, at this time official Washington does not seem to feel this potential benefit. The greater risk is that if the United States does not participate in the solution, the resulting system may isolate America, and in the long run, really damage the international economic standing of the United States.
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