11.04.2009
April 8, 2009 (the date of publication in Russian)
Grigory Tinsky
THE PRESCRIPTIONS OF THE "LONDON BOARD OF DOCTORS"
Antipyretics and vitamins will bring relief but not recovery to the patient
GOOD INTENTIONS
The G-20 summit is over, and it makes sense to summarize its most obvious results. The very fact that the leaders of the twenty major powers, meeting in London, demonstrated their joint commitment to reconstruct the global economic and financial system should be recognized as a victory of common sense. Despite profound difference in approach to and evaluation of the current crisis, inevitable confrontation of interests and above all, obscurity of both the ethiology of the disaster and adequate remedies of treatment, the G-20 leaders agreed to carry out concerted efforts for recovery of the global economy from the deep recession it has sunk into. This positive result is significant, but unfortunately, the prospects of the joint endeavor are still vague.
For a better insight into the process of relevant economic and political decision-making, we should first analyze the starting points of the major players revealed in London.
THE UNITED STATES OF AMERICA
The objectives Barack Obama pursued in London were clear:
- to convince the participants to follow Washington's policy line, and expand state expenses for support of national economies;
- to present his own project of the financial system's regulation, designed for protection of investors and prevention of future crises;
- to assure the partners of necessity to beef up the IMF's capital, possibly without losing influence in the institute;
- to maintain the US dollar's status of a global reserve currency.
On the eve of the event, Treasury Secretary Tim Geithner declares: "The G-20 member states should agree to introduce a fiscal stimulus amounting annually to 2% of the gross world product in 2009-2010". In his article for Die Welt, Barack Obama himself explains to the reluctant European governments that it would be unjust to expect from nations, which are already implementing extraordinary measures, to drag out those who are staying idle.
One more objective of the US leadership at the event was to sabotage the Chinese-Russian proposal on introducing a new global currency based on special drawing rights (SDR). In fact, the United States had been obstructing this agenda for twelve years, as SDR, once introduced as a capable alternative to the dollar, would inflict a catastrophe for the US economy, dumping the currency along with the celebrated treasury bonds.
THE EUROPEAN UNION
For natural reasons, the highly diversified European community is hardly able to elaborate a unified recipe of overcoming the crisis. The 27 national economies require various kinds of medicine, as 16 of them are inside the Eurozone, while in the rest 11 cases, the disease has taken a form of its own, sometimes reaching the extent of agony.
Still, the EU has managed to formulate several common priorities, expressed in:
- international coordination of tax policy;
- overcoming protectionism, or economic nationalism;
- a reform of the IMF;
- restriction of the financial market's regulation;
- support of poorest nations.
In fact, there is no unity in the European ranks in each of these points, as every EU member interprets these theses in its own way. One could single out the (pretty justified) criticism of Nicolas Sarkozy's protectionism, the literally disintegrating economy of Latvia, and a lot of particular internal contradictions between EU members.
JAPAN
The Land of the Rising Sun appeared to be the only participant of the G-20 summit that failed to present any official viewpoint on the eve of the London event. The "smother instead of approach" in the sakura land was explained with the fact that the current finance minister, Kaoru Yosano, is the fourth person in this capacity during the past year.
Yosano's predecessor, Shoichi Nakagawa, signed a deal with the IMF on issuing a $100 billion loan for support of the economies of Pakistan, Iceland, and Hungary. The Japanese Bank of International Cooperation (JBIC) earmarked a sum of $2 billion to one of the World Bank's subsidiaries for support of poorest nations. Thus, Japan demonstrates its commitment and capability to shoulder a part of troubles of European and Asiatic nations.
At the same time, WTO General Director Pascal Lamy expresses concern over protectionist policy of Japan's government. In their turn, Japanese experts intone that the issue of replacement of the US dollar as the major reserve currency with SDR could not be approved at the London event, but the very fact the issue was raised in advance, as they believe, suggests that the G-20 is likely to re-assess this option.
Tokyo's readiness to assist other nations during the crisis ostensibly contradicts to the not very promising results of Japan's own economy. At the same time, the Japanese government considers a convenient possibility to float its financial resources outside the country under more favorable conditions than inside.
PEOPLE'S REPUBLIC OF CHINA
The Chinese have entered London as a knight in shining armor. China appears to be one of the few states which maintain a comparatively high level of economic growth. Though the annual surplus decreased to 6.8% in the fourth quarter of 2008, industrial nations are understandably envious to such a "fall". Beijing possesses $2 trillion of currency reserves. The weak point is that at the same time, China is the largest foreign possessor of US treasury bonds. The official Beijing has never declared relief of customs barriers for Chinese goods as the primary task of the Celestial Empire, also ostensibly not favoring protectionism.
Officially, the Chinese delegation formulated the following requirements:
- reform of the IMF;
- a new global reserve currency;
- restricted regulation of financial markets;
- increase of state expenses for stimulating economic growth.
China's Vice Foreign Minister He Yafei claimed that "the world's third largest economy with the greatest currency reserves should acquire relevant influence in the Fund". Today, China holds only 3.7% of the IMF vote, and India holds 1.9%. Meanwhile, the US share amounts to 17%, and the EU share comprises 32%.
In exchange for increase of influence, China agreed to disburse $100 billion for the IMF – as much as Japan.
According to the official statement of China's Central Bank, the reform of the financial system should focus on creation of a reserve currency that would remain independent from activities of particular nations and their capability to maintain sustainable growth. Thus, China proposes to replace the US dollar by SDR, arguing that the domination of the US currency has resulted in a high frequency of crisis since the abolition of par value rates system in early 1970s, while introducing a new reserve currency would alleviate risks of new crisis tendencies in global economy. Still, China does not insist on immediate change, obviously being uninterested in the abrupt crash of the dollar, as it would be too devastating for the Chinese economy in its current shape.
BRAZIL
During British PM Gordon Brown's visit to Brazil on March 26-27, 2009, Brazil's president Ignacio Lula da Silva claimed that the crisis was brought about by "white people with blue eyes". In London, the dark-skinned US President, embracing the Brazilian colleague, inquired whether he people he meant were Americans. Appraising Mr. Obama's wit, we have to admit that his personal charm cannot reveal the truth Lula expressed:
"The crisis was provoked with irrational behavior of the white minority that had been displaying omniscience of the global economy's development, and is now trying to escape responsibility for the self-made disaster. However, this part of the global establishment has to pay for this failure".
As the largest country of Ibero-America and one of the leaders of emerging economies, Brazil seeks a higher influence in global decision-making. Lula arrived in London with his own proposal of the IMF's reform that suggests an increased role of BRIC states (Brazil, Russia, India, China) in distribution of credit lines for those nations that have found themselves in the direst situation due to the global economic disaster.
RUSSIA
Western financial experts admitted that Dmitry Medvedev's only objective in London was to promote dethronization of the US dollar. In fact, Russian proposals concerned a change of the whole architecture of the global financial system, with emergence of new financial centers and expansion of the array of reserve currencies. Medvedev presented an ambitious project of a new system of management of the globalization process. The list of his proposals included:
- new agreements and treaties;
- new reserve currencies;
- a new system of risk management;
- reform of the IMF and its adaptation to the new reality;
- support of demand;
- an energy-related concept of economic growth.
Still, though Russian initiatives really included an attempt of "assault of the dollar", the basic character of Moscow proposals deserves a more detailed analysis. Acknowledging necessity of an utter revision of the whole monetary and financial system, Russia proposed to convene an international conference that would elaborate a new architecture of financial markets.
One more Russia's idea is to establish a Standard Universal Regulatory Framework (SURF). This initiative suggests use of the IMF for monitoring financial institutions, instruments, and transactions, as well as standards of rating agencies and models of cooperation between national financial regulators. Russia also proposed to introduce national criteria for basic assets in the turnover of international derivatives.
One of the most significant elements of the Russian initiative is transition to accounting and pricing in various currencies, and compliance of emitters with particular requirements. This idea suggests two scenarios: either multiplication of reserve currencies, or creation of a supranational reserve currency, issued possibly by the IMF (SDR viewed as one of the possible options).
In the interests of stability of the global financial system, Russia has proposed a new system of financial risk management, based on more objective criteria of estimation of capitals, control of their structure, and assessment of its elements. These measures are supposed to prevent emergence of new "soap bubbles" at financial markets.
Russia's proposals, associated with energy resources, deserve special interest. The Russian leadership reminds that by the end of the crisis, the global economic system may face acute shortage of energy resources after years of decreased extraction. This may result in an enormous price hike. In order to prevent this development, nations should undertake emergency measures to alleviate fluctuations of prices, to create an atmosphere of confidence between providing, consuming, and transiting nations, and concentrate on implementation of energy-saving technologies and use of alternative sources of energy.
THE DIAGNOSIS AND PRESCRIPTIONS
Summarizing the truly unprecedented summit of leaders of most powerful nations, we have to ruefully admit that the council of physicians that convened at the bedside of the severely sick global financial and economic system, failed to carry out it major objective: to formulate the diagnosis. Despite declaration of success and zooming quotations, the global political establishment has not yet decided what to do next. Everybody's victory is a non-victory. The public applauds, but the patient is still rather dead than alive.
Still, each of the participants can convey to his electorate that he strongly defended national priorities. Europe has successfully rejected Washington's importunate arguments for the fiscal stimulus, thus escaping increase of budget pressure, while the United States and Great Britain have protected the freedom of hedge funds and expanded the IMF's capital. Meanwhile, the assault on the US dollar is postponed for an uncertain period of time.
China and India have acquired guarantees that their all-pervading export would not be intercepted by customs barriers. The two nations were even promised to attain a larger vote in the IMF and the World Bank.
In its turn, Russia has achieved implementation of FSB – not Federal Security Bureau but Financial Stability Board, corresponding with the SURF initiative. Other Russian proposals were not rejected, while their later implementation, in case of coordinated policy with the EU and BRIC partners is perfectly available. Moreover, the foundation of the Financial Stability Board may be recognized as the most substantial result of the London summit.
One more achievement is restriction of offshore operations. Though Gordon Brown proposed to persecute only those offshore banks that don't disclose the owners' privacy, the very fact that Great Britain, the mother of offshore financing, encouraged this effort is highly indicative. According to various estimations, offshore operations encompass almost one third of the whole global capital, and significantly dry out national revenues. This problem is especially serious for Russia. Due to uncontrolled activities of companies, registered in tax oases, it is presently hard to make out who owns Russia's major industries. An indicative example was highlighted a week ago, when all the national TV channels reported about a scandal in Primorsky Krai (Far East), where the personnel of a company named Russian Tungsten had not received any wages for several months before it was found out that the mother company is registered on the Seychelles, and its owners are unknown. The regional prosecution is still unaware how to help the workers.
Analyzing the structure of property of the largest Russian corporations, we realize that many banks and oil giants belong to residents of Cyprus, Seychelles, Panama, and various exotic islands familiar only to geographers. Lack of control in this sphere of economic regulation has enabled even the major TV channel, Channel I, to sell 25% of its stock to mysterious Eberlink 2002 and Rastrcom 2002 companies, registered respectively on the Seychelles and in Panama.
How could some unknown Panamanian and Seychelles nationals have managed to grasp one quarter of the major propagandist resource of the nations, with capitalization exceeding $1 billion? Could these mysterious persons have surnames perfectly familiar to the Moscow reading audience?
The London council of physicians has prescribed vitamins and relieved the fever, which is not bad, and even a bit helpful for a while. But radical treatment is still ahead.
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