Prime Minister Vladimir Putin proposed new global economy architecture in Davos
Prime Minister Vladimir Putin's opening speech at the World Economic Forum in Davos will become a subject of many discussions far beyond Switzerland. The Russian Prime Minister has proposed what amounts to a new world order, which will replace the existing uni-polar world with the only leading nation and a single reserve currency.
This year, the businessmen and politicians attending the forum arrived in Davos by bus or by car rather than by helicopters as in previous years. Participants opted for serpentine roads not because it was cheaper, but because the thick fog in the Alps made air transportation impossible. Figuratively speaking, the mood among the participants matched the weather - no clear picture ahead. They were in Davos to clarify things.
Traditionally, there is only one opening speech at the forum. The speaker sets the tone and formulates the main topics for discussions, as well as receives a unique opportunity to promote his ideas and his country. In a sense, the current economic downturn played into the speaker's hands, since if not for the crisis, the forum would have hardly gathered 2,500 participants.
"We have not seen anything like this before," the organisers say. Everybody pins hopes on the Davos forum. While no decisions are taken here, there are hopes that an idea may emerge that will be accepted by policymakers.
Why Putin?
Why was Mr Putin chosen to open the forum? The majority of the forum's regular participants named the Russian Prime Minister when asked whom they wanted to see the opening speaker. It should be noted that the polling was conducted in the summer, long before the "gas war" between Russia and Ukraine. It is just that the developed countries that have been hit the hardest by the crisis have demonstrated their inability to cope with their own issues. They have failed to propose anything new except to infuse their banking systems with cash in exchange for ownership rights.
"We have to admit that the West's political and economic power has been shifting to the East," Klaus Schwab, Forum Executive Chairman, said in his opening remark.
"Not a single contemporary issue can be solved without Russia," added Mr Schwab, while giving the floor to Mr Putin. "Russia was and continues to be a challenge for international community."
Prime Minister Putin fully justified that status - his speech was truly challenging.
A four-point challenge to the world order
"There is a concept called a perfect storm, which is when forces of nature concentrate in one point of the ocean and increase their destructive power manifold. The current crisis resembles such a perfect storm," the Prime Minister said. What and who has caused it?
"Over the recent months, virtually every discussion of the economic crisis begins with criticising the US. I am not going to do that and will only say that just a year ago our American friends were assuring us from this rostrum that the US economy was fundamentally strong and had wonderful prospects. Today, however, the famous Wall Street investment banks have practically ceased to exist. In a period of one year their losses have exceeded the profits they had made in over a quarter of a century," Mr Putin said.
Everybody is to blame for the crisis - they saw it coming but did nothing to prevent it.
"The crisis arrived unexpectedly, just like the winter in Russia," Mr Putin joked and the audience burst into laughter.
According to Mr Putin, the depth and the duration of the crisis will depend on the promptness and accuracy of the decisions that the world is waiting for. He then proposed a four-point plan.
First.
"To draw the line and to show one's cards. The write-off of irrecoverable debts and bad assets is inevitable. To avoid clearing the balance sheets means to prolong the crisis.
Second.
"To eliminate virtual money, exaggerated accounting reports, and questionable credit ratings."
This, according to the Prime Minister, means that the fundamental asset value, as opposed to stock market value, should once again become the foundation of the auditing system.
Third.
"The dependence on a single reserve currency is dangerous." This means that several regional currencies should exist, in addition to the dollar. Mr Putin did not mention the rouble, but it is assumed that it would be one the regional currencies.
Fourth.
The monetary policies of the countries-issuers of reserve currencies should be more transparent, as most other countries' reserves are held in these currencies. A new system of global regulators is necessary that will be based on international law. In other words - a real multi-polar world.
Reform oil price formation.
"We propose that a new international legal framework for energy security should be established," Mr Putin said, driving another nail into the coffin of the existing world order.
He proposed no less than to reform the system of energy price formation. Mr Putin harshly criticised the speculative system that instantaneously drives the prices up or down. The current sharp fall of oil prices represents a threat to the world economy. It may result in decreased oil production investments and discontinued energy conservation, "which eventually will lead to another uncontrollable price increase at the stage of economic recovery and, thus, undermine the prospects of the recovery."
To avoid such scenario, Mr Putin suggested that the energy market should be cleared of speculative derivative instruments. In other words, the stock market system should be reformed to make trading futures and many other "virtual" financial instruments impossible.
The key question that the forum's participants will need to answer is whether they are ready to launch serious reforms that will take no less than three years to work or they will opt for short-term financial infusions, which can temporarily reduce the pain, but are unable to cure the weakened organism of the world economy.
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What did you like the most in Mr Putin's speech?
First Deputy Prime Minister Igor Shuvalov
"No matter who is to blame, we need to overcome the crisis all together. The fact that the Prime Minister wished success to the US is a very positive signal. Everybody was expecting a confrontational speech, but it proved to be very positive."
Arkady Dvorkovich, Presidential Aide
"I find two points very important. First, a balance between complex and easy decisions. Second, some concrete proposals, including the need for a New Energy Charter and the responsibility of the countries that have real influence on the global economy.
Deputy Minister of Economic Development Stanislav Voskresensky
"Using analogies from the World War II, we are still in 1941, not 1943. Now it is not yet time for final recipes, and Mr Putin did stress this. Most importantly, Mr Putin outlined what not to do; he also said that there were no easy solutions."
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The causes of the crisis:
- the collapse of the existing financial system is a result of improper regulation, due to which great risks were left without control and regulation;
- the "enormous imbalances" accumulated during the recent years, between the scale of the financial operations and the fundamental asset value; the increased demand for credit and sources of their availability ;
- a serious breakdown of the global economic growth system, where one centre is printing money and consuming the goods without any restrictions and control, whereas the other centre is producing inexpensive goods and saving the money issued by other countries;
- disproportionate allocation of wealth among various segments of population within countries as well as among various states and regions of the world
- excessive expectations provoked exaggerated appetites of corporations for the ever growing demand. The race of stock market indexes and capitalisations took over the companies' productivity growth and their real efficiency. Intensive consumption growth was at the expense of future generations.
By Elena Shishkunova