THE FIRST STEP

Leaders of the world's 20 largest economies discussed ways of ending the world financial crisis on 15 November in Washington. The Group of 20, or G20, which accounts for 85% of the world's GDP, includes the United States, Britain, Russia, Australia, Argentina, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Saudi Arabia, South Africa, South Korea and Turkey. In addition, European Commission President Jose Manuel Barroso, UN Secretary-General Ban Ki-moon, World Bank President Robert Zoellick, International Monetary Fund Managing Director Dominique Strauss-Kahn and Financial Stability Forum Chairman Mario Draghi took part in the summit. The president elect of the United States was represented at the forum by former Secretary of State Madeleine Albright and former Republican Congressman James Leach.

Five principles

The G20 adopted a joint declaration stating five principles for reform of the world financial system - increasing transparency and accountability, creating reliable regulatory mechanisms, introducing coordination between financial markets, strengthening international coordination and reforming international financial institutions.

There are three main directions of reform: measures to support the economy and the financial sector, creation of new levers of international regulation and reforms to the system of international management. For example, within the framework of measures of support for the economy and financial sector, a commission is to be created to monitor the world's 30 largest banks (whose bankruptcy would pose a threat to the international economy). The special commission will first and foremost set about "assessing present risks."  The Swiss bank UBS was cited as a glaring example; it operates all over the world and its assets exceed the entire Swiss GDP by several times. It was made clear that in these circumstances national authorities can neither properly control a company's activities nor come to its assistance if necessary. This is why supranational supervisory bodies are needed.

Incidentally, the concluding document lists detailed specific requirements for organisations of financial regulation and control which set accounting standards, and for credit rating agencies, tax authorities and so on.

As for reforms to international financial institutions, this implies increases to their operating funds and the right to vote for developing countries. It was also decided to refrain from protectionism and the introduction of new trade and investment barriers next year (this is especially important for the world's largest economy, the United States). The action plan also envisages the provision of assistance by the IMF and development banks to countries affected by the crisis. Thus it seems that the IMF will play the major role in rebuilding the international financial system and in the economic stability which will follow.

As a result, the thrust of the final declaration may be expressed in a single sentence:  "The Bretton Woods system should be thoroughly reformed so that it can better adapt to the changing balance of power in the world economy and react more efficiently to future challenges." Or, in simple terms: the leading nations will try their best to prevent future crises. It is noted in the action plan for implementation of the reforms that many of the measures need to be taken urgently and should be implemented by 31 March 2009, in other words, by the next G20 summit. Specific proposals for global regulation of the economy will be developed by then.

This is only the beginning...

In the mean time, the crisis is very far from over yet, and experts say that it will last for another year and a half at least. The world's largest economy, the United States, is frantically searching for a way out of the current situation.

Back when Barack Obama was still to be approved as Democrat candidate, the war in Iraq was identified as the highest-priority issue for the new tenant of the White House if Obama were to become president. However, the events of recent months show that when something goes amiss at home, everything else becomes less important.

They say that the United States has not been through anything like this since the Great Depression. The rate of building new residential homes is falling and companies are forced to cut prices to at least sell something. Five days after the Washington summit, the main US stock market indicators fell. The Dow Jones Industrial Average lost 427.63 points (5.08%), reaching, by the end of trading, a level of 7999.12. The Standard & Poors composite 500 index fell by 6.04% (51.84 points) to 807.26. The high-tech Nasdaq index lost 93.85 points (6.33%), closing at 1389.42. All three main stock market indicators reached their lowest point since 2003. In the opinion of stock market analysts, the fall in the stock markets was caused by the publication of negative statistical data on levels of inflation in the United States. In addition, the mood of market players was influenced by a Treasury statement in which a lengthy recession was admitted to be a realistic possibility. "A grave recession is now almost inevitable," The Washington Post wrote.

The new US Administration will now have to lead the country out of the grip of crisis. The president elect said that his team was already working on a two-year plan of radical rehabilitation for the national economy, which envisages the creation of 2.5 million new jobs. Obama stressed at the same time that there was a need to act quickly to avoid a profound economic slump, although he did not say how much his plan would cost the national budget. The new administration is also looking into the possibility of creating and developing renewable sources of energy to reduce US dependence on imported oil.

Obama supported the action plan adopted in Washington, but he immediately went on to harshly criticize the Bush administration for its slowness to help ordinary Americans enduring the hardships of the unfolding crisis. In an interview with CBS, he pointed out that the federal government was concentrating its efforts on helping the banks first and foremost and attaching least importance to aid to those millions of US citizens who had already lost their homes or were about to lose them because of the mortgage crisis. Obama also wants to provide urgent assistance to US carmakers who are suffering gigantic losses because of a dramatic fall in demand for their products. The president elect stressed that the failure of the car industry would "lead to catastrophe" for the national economy. Time will tell how all this fits with his assurances of support for the above-mentioned action plan.

Meanwhile, the economies of Euro zone countries are already in recession. According to preliminary reports, the Euro zone GDP fell by 0.2% in the third quarter of 2008. Bloomberg reports that the European economy is going through its first crisis of the last 15 years. It was announced earlier that the economies of Italy, Germany and Estonia were also on the way to technical recession. France has managed to avert this for now because its economy grew by 0.1% in the third quarter. The world's second largest economy, Japan, has also entered a recessional phase.

In this situation, the international media are shifting their focus to the effects of the international crisis on Russia. This is happening because the recent strengthening of Moscow's foreign political position hinged precisely on the country's economic growth, which was greatly facilitated by the oil boom. In principle, this formula works for any nation, but not all nations are as ambitious as the Russian Federation.

Forecasts for Russia became particularly negative once oil prices first went near and then crossed the psychologically important line of $50 per barrel. In addition, the flight of capital from the country continues. The Russian periodical Vedomosti reports that about 30% of Russian companies are planning, or have already implemented, job cuts. In this light, analysts predict a devaluation of the ruble and a dramatic slump in living standards next year. However, the country's authorities, in the persons of President Dmitriy Medvedev and Prime Minister Vladimir Putin, continue to display optimism. In his speech to the United Russia party congress, Putin said that the national economy was still going strong. Medvedev also subscribes to that point of view. Some experts support their opinion and say that Russia might manage to hold strong: after all, when the crisis hit, the country had no national debt and had a budget surplus.

However, international observers are cautious about the haste with which amendments to the Russian Constitution were made to extend the presidential and parliamentary terms of office. After all, parliamentary and presidential elections were held only recently and the authorities should clearly have their hands full with other things to do. The conclusion is that the economic and financial crisis might lead Russia to political crisis. On the other hand, Putin somehow needs to avoid responsibility for changes in the country which are far from positive. As a result, Putin might be able to come back to the Kremlin after a series of reshuffles, taking on the role of saviour of the people, like a Russian Franklin Roosevelt.

Wind of change

So, just like Russia and the United States, all G20 countries have found themselves in a crisis against a backdrop of their own problems. But what was clearly realized in Washington, and what is considered by many people the main outcome of the summit, is the demonstration of a will to cooperate and recognize that, despite all the differences, all the nations of the world are in the same boat. No one expected that a cure for the ailing international financial system could be found over the weekend. Of course, the Washington summit was nothing like the Bretton Woods talks which, after two years of preparation, lasted three weeks and resulted in the establishment of an international system to organise financial relations and trade exchange. Nonetheless, the first steps were taken on the banks of Potomac. It is obvious that the global system created more than half a century ago cannot provide a firm foundation for the dramatic changes we have witnessed recently.

And the extent and speed of these changes are truly dazzling. No one even thinks now about a unipolar world. And everyone is very suspicious of any kind of forecast. If our readers remember, just a few months ago various analysts predicted authoritatively that oil prices would go above $200 per barrel. However, they actually fell to around $50. So what are the forces that govern political and economic change in the world? Possibly, the present financial crisis will give us some answers to this question. A world order which rested on the political, cultural and economic superiority of the West is dissolving right before our eyes, and whatever replaces it will be different. Recently, the US National Intelligence Council published the Global Trends 2025 report, in which US analysts themselves speak about the "decline of America as the dominant world power." "The international system -as constructed after the Second World War - will be almost unrecognizable by 2025, due to the rise of emerging powers, a globalizing economy, a historic transfer of relative wealth and economic power from West to East, and the growing influence of other organisations than the nation state. Although the United States is likely to remain the single most powerful agent, its relative strength - even in the military realm - will decline and US leverage will become more constrained," the report reads.  The role of the US dollar as the world's most important international currency will decrease to a level at which it will be considered "first among equals." At the same time, African and South Asian countries will remain most vulnerable and the arms race in the Near East will continue, while destructive nations will be even more proactive in passing weapons to terrorist groups. Conflicts over resources, including food and water, are likely, the report reads.

So, a review of the situation and the development of new mechanisms to combat crises - financial, economic, and political - would certainly help us all avert global catastrophes in the future. Whether or not incumbent world leaders can reach the right decisions, only time will tell. The next G20 summit is scheduled for 30 April 2009. President-elect Barack Obama, who will be inaugurated on 20 January 2009, will then join his colleagues.

The G20 summit will be just the first in a succession of similar events. Many people are certain that this is proof of a transition from G8 to G20, in which the BRIC (Brasil, Russia, India, China) nations will be equal to the West, both economically and politically.