By Yulia Lokshina
Leaders of two developing economies agree on the most important issues
Each meeting of the World Economic Forum (WEF) leaves a mark in history and not necessarily an economic one.
We can trace a direct link between Davos and Russia. It was in Davos that a union of capitals was forged in January 1996, which later played a crucial role in the outcome of the presidential elections in Russia. The results of the current forum in Davos will also have an impact on Russia, but in a much broader context. The main objective of the current forum is to understand and to start shaping the post-crisis world order. The main result of the forum is that its two brightest stars, Prime Minister Vladimir Putin and the Premier of China's State Council Wen Jiabao, demonstrated that they share a common view of the world economy's future and of the changes it will need to undergo after the economic crisis.
Mr Putin and Mr Wen Jiabao share the basic principles on how to overcome the economic crisis, although they do have differences as well.
For example, the Russian Government is reluctant to reduce taxes, particularly VAT. The Ministry of Finance believes that reducing taxes in developing economies does not result in economic growth, but increases the budget deficit. Furthermore, the tax burden in Russia has already been significantly reduced since 2000. In China, on the contrary, "there are over 100 administrative taxes," the Chinese Premier admitted; nonetheless, the Chinese government is planning to suspend them.
Still, the two largest developing economies share the same general approach. According to Prime Minister Putin, "the moribund unipolar world economic order" should be replaced by a system "based on the interaction of several large centres."
Premier Wen Jiabao was more diplomatic, but his suggestion was no less unpleasant for the American economy. "It is necessary to expand the reform of the international financial system and accelerate the establishment of a new international financial order," he said.
NEW GLOBAL CURRENCY ORDER
"The current crisis has demonstrated the shortcomings of the existing financial system and its regulatory system," Premier Wen Jiabao issued his verdict to the unipolar financial regulation. His proposed formula was rather vague, however. "It is important to accelerate reforming the regulatory structures of the world largest financial institutions; establish a reasonable mechanism of global financial rescue; and enhance the capabilities for realising commitments," Premier Wen Jiabao said.
Prime Minister Putin was more specific and assertive in his assessments. "The excessive dependence on a single reserve currency (US dollar - Gazeta) is dangerous for the global economy. I believe this is now obvious to everyone. Therefore, we should encourage the emergence of several strong regional currencies, which is an objective process. The time has come to start a detailed discussion on how to make a smooth and irreversible transition to this new model."
Nevertheless, the two leaders are in agreement that the post-crisis world, which is being currently outlined in Davos, should be based on several reserve currencies. The dollar is clearly failing to perform its role. It could be assisted by the euro, the future Persian Gulf single currency, the yen, the yuan, and maybe the rouble, which could become a regional currency for the EurAsEC member states and possibly the entire CIS. The interests of the two major developing economies clearly coincide in this issue. If Beijing and Moscow become regional financial centres, it will ensure their leadership in Asia. Of course, rivalry is also a possibility; however, the latest (October 30, 2008) Heads of Government meeting of the Shanghai Cooperation Organisation demonstrated that China is ready to respect both its own interests and those of Russia in the region.
The emergence of the regional currencies system to replace the dollar as the single reserve currency will mean that the US economy will to a lesser extent exist at the expense of the rest of the world.
As the Chinese Premier said, "we should encourage regional monetary and financial cooperation, utilise regional assistance mechanisms to counter liquidity shortages more efficiently, and steadily move towards a more diversified international monetary system.
NEW FINANCIAL INSTITUTIONS
Mr Putin and Mr Jiabao have also agreed on the need to reform the existing international financial institutions - first of all, the International Monetary Fund and the World Bank. Prime Minister Putin said that "it is necessary to strengthen the system of global regulators, based on international law and multilateral international agreements. That is why it is so important to reconsider the role of the leading international organisations and institutions. I am convinced that we can shape a more fair and efficient global economic architecture."
The Chinese Premier believes that "it is important to accelerate the reform of the regulatory structures of the major international financial institutions and to establish a reasonable global financial rescue mechanism."
Both leaders also agree on the specific changes required in the IMF and the World Bank. These measures include increasing the special drawing rights (SDR) shares for Russia, China, India, Brazil, and Mexico, and South Africa at the expense of the SDR shares of the developed countries, and the US in particular. According to Wen Jiabao, it is essential to "have more rights and a wider representation in international financial institutions."
REGULATING THE US
Most importantly, both leaders have agreed that without enhancing the supranational financial regulation standards (in Veliky Novgorod, Mr Putin mentioned "universal standards"), the lessons of the global economic and financial crisis would not be learned. This time, the Russian Prime Minister was more careful in his assessment than his Chinese counterpart. "Most countries in the world invest their international reserves in foreign currencies and would like to be certain that their investments are safe. The reserve and accounting currency issuers, in their turn, are genuinely interested in having their currencies in demand and trusted by other countries."
Clearly the currency in question is the US dollar, the first global currency of the world.
Mr Wen Jiabao also did not mention the United States, but he was more specific in his comments. "We should expand the regulation of the international financial system, with particular emphasis on strengthening the supervision on major reserve currency countries. We should put in place a timely and efficient early warning system against crisis. We should introduce reasonable and effective financial regulatory standards and improve oversight mechanisms in such areas as accounting standards and capital adequacy requirements. We should tighten regulation of financial institutions and intermediaries and enhance transparency of financial markets and products."
In essence, the Chinese leader has formulated a global task for reforming the international financial market, and the crux of the proposed financial regulation strengthening is clearly aimed at the US.
At an interview prior to the Economic Forum in Davos, Mr Putin was asked whether Russia's economy could truly claim to be on par with that of China, considering that latter is much larger and more diversified. The Prime Minister responded that Russia was open to dialogue with everyone.
In Davos, it became clear that it was the interaction of Russia and China on reforming the global economic supranational regulatory system that could become the crucial factor in shaping the post-crisis world order.
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BANKS LINING UP FOR MONEY
Speaking on the sidelines of the Forum on Thursday, Vneshtorgbank (VTB) Head Andrei Kostin said that his bank, together with Sberbank and Gazprombank, were considering the possibility of "securitisation of their first-class mortgage loans in Russia and abroad to the amount of 300-350 billion roubles."
In total, the mortgages held by all three banks amount to 500 billion roubles; however, only slightly over half of them are considered first-class. "About 300 billion to 350 billion roubles could be included into the Pension Fund or the National Welfare Fund portfolios," Kostin said. He added that the European Central Bank (ECB) could become the liquidity source abroad.
The head of VTB has already discussed this with the ECB chief Jean-Claude Troche. Mr Kostin believes that it would only be fair if the ECB finances Russian banks, as foreign bank affiliates in Russia have access to the Bank of Russia's funds. "We will strive to be perceived as equals," Mr Kostin said.
He also told reporters that within a period of one to two weeks, the VTB was expecting the Government approval for additional capitalisation to the amount of 200 billion roubles.
Mr Kostin explained that the additional capitalisation was required to cover for the increasing arrears that on average amounted to 4%, but could potentially increase up to 10% in 2009 and 2010.
On Monday, the issue of additional banking capitalisation was discussed at a meeting, convened by First Deputy Prime Minister Igor Shuvalov. Vnesheconombank (VEB) also needs additional capitalisation. VEB has requested an additional 100 billion from the Government, Vladimir Dmitriyev, head of VEB said.
Mr Dmitriyev also said the bank would no longer fund the Russian stock market from the National Welfare Fund's resources. The bank, according to Mr Dmitriyev, has exhausted the funds allocated for its purpose - that is, 175 billion roubles. VEB is currently developing a new financial instrument - currency bonds to be placed in Russian banks with extra currency liquidity. The funds accrued from the bonds will be used to refinance the resources received from the Bank of Russia's international reserves for crediting banks and companies, as well as to refinance foreign debts. This instrument will allow the bank to reduce issuing refinancing loans out of the $50 billion that VEB received from the Bank of Russia.
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THE CONFIDENCE LEVEL IN THE EUROPEAN UNION'S ECONOMY HAS REACHED ITS LOWEST
By Konstantin Smirnov
In January 2009, the consolidated business and consumer confidence level indexes in the economy of the European Union and the eurozone have reached the lowest point since they have been measured beginning January 1985.
According to the European Commission, the consolidated eurozone economy confidence index, covering 16 states (Slovakia joined the eurozone on January 1, 2009) fell to 68.9 points in January, whereas in November the index stood at 74.9 points.
The business confidence index also dropped from -33 points in December, to -34 points in January, the lowest index ever. The consumer confidence index decreased from -30 points in December to -31 points in January.
Experts at Dow Jones believe that European Central Bank's reduction of the base interest rate by a total of 2.25 points since July last year and the multi-billion infusions into the economy have failed to arrest the trend towards the decreasing of both the business and consumer confidence levels in the eurozone.
The future of the eurozone looks problematic. The International Monetary Fund (IMF) predicts that the eurozone GDP will decrease by 2% this year. The Fund's earlier prognosis predicted only a 0.5% reduction.
