Translated material
In the turbulence zone
Russia took advantage of the crisis in the IMF and World Bank
The annual meeting of the governors of the International Monetary Fund and the World Bank, which closes today in Washington, did not bring any clarity to the difficult situation in global financial markets and the prospects for its resolution. Both the IMF shareholders and the finance ministers and heads of central banks of the G7 countries who met on Friday spoke extremely cautiously on this matter. The outcome documents emphasize that the causes of "turbulence" in markets need to be carefully examined before possible actions are discussed. Such caution is most likely explained by the fact that global financial regulators are not only powerless in the current situation, but also really do not know how deep the crisis is.How to calculate risks
Discussion of instability in world markets, provoked by the crisis in the US mortgage sector, was to be one of the main items on the agenda of the Washington meetings. But already the day before it became clear that the emphasis in the discussions would be placed differently. Few people wanted to admit that financial markets had become a victim of their own rapid development, and certainly no one wanted to create the rules of the game for the markets. Therefore, things were called by their proper names with the utmost care. The G7 communiqué said the response to financial instability “must be based on a full analysis of its causes.” And then G7 financiers add that financial innovation has contributed to economic growth in their countries, and they themselves refuse any intervention: “We expect market participants to take action to correct the shortcomings that have been exposed by recent events.” The wording in the final statement of the International Monetary and Financial Committee (IMFC is the key fund management body, uniting 24 ministers) turned out to be a little bolder. It already says that financial innovation and the securitization mechanism have created “new challenges that need to be given due attention.”
At the same time, Deputy Prime Minister Alexei Kudrin, manager of the IMF for Russia, in his statement at the IMFC meeting, suggested that not only increased transparency in trading in complex financial instruments would be needed, but also some new steps in regulating the banking sector. Mr. Kudrin noted that the use of increasingly complex financial instruments and risk-sharing technologies, which is considered a strength of developed financial systems, simultaneously becomes their weakness: ultimately, the confidence of market participants was undermined as a result of major errors in risk assessment.
The Russian Finance Minister believes that the IMF is overly optimistic about the nature of the slowdown in global economic growth. As you know, the fund lowered its forecast for global GDP growth for 2008 by almost 0.5 percentage points - to 4.75%. Alexey Kudrin believes that there is a high probability of a deeper slowdown in growth rates in 2008. He proceeds from the fact that the likely materialization of risks may have a negative impact on the development of events. He also points to sources of uncertainty: it is still difficult to predict how quickly the revaluation of financial assets will occur, what losses leading financial institutions will face and whether there will be an overall serious increase in interest rates. It will also take some time to restore mutual trust among market participants.
It is noteworthy that the moderate optimism of IMF experts is based on the expectation of high growth rates in the main countries with emerging markets - this will compensate for the slowdown in growth in developed economies. The latest global economic review published last week notes that about half of global GDP growth last year came from China, India and Russia.
Formula for the impossible
Emerging markets are playing an increasing role not only in supporting global economic growth. On Saturday, it was their position that determined the IMFC's decision on the main issue of reforming the fund - the revision of shareholder quotas. As is known, the fund was forced to begin this work under pressure from developing countries, whose contribution to the world economy has grown significantly compared to the realities of 60 years ago, when the IMF capital structure was basically formed. A year and a half ago, the managing director of the fund, Rodrigo de Rato, proposed reform in two stages - first, a one-time increase in quotas for the most “underrepresented” countries, and then a complete revision of the formula for calculating quotas, making it simple and understandable. The first stage was overcome a year ago, but creating a simple formula turned out to be far from easy.
“The absurdity of the current formulas has long been obvious. I don’t know of a single argument in favor of the fact that the European Union should have a third of the votes - twice as much as the United States and three times as much as all developing countries in Asia, as it exists now,” the IMF executive director from Russia's Alexey Mozhin a month ago, when Rodrigo de Rato came to Moscow to campaign for another version of the formula.
However, if the existing formulas are absurd, then the creation of new ones was accompanied by the formulation of an impossible task. On the one hand, the goal of the whole idea is to increase the representation of large developing economies - China, India, Mexico, Brazil, etc. This can only be done by reducing the share of the European Union (32.41%), but the Europeans, of course, are preventing this. Therefore, on the other hand, Rodrigo de Rato and his subordinates had to manage to draw up a formula that would look fair, but would not greatly affect the interests of the European Union.
It seemed that there was no compromise, and the task of revising quotas would be first on the agenda of the future managing director of the IMF, the Frenchman Dominique Strauss-Kahn. In fact, he was already preparing for this, explaining how he would persuade the Europeans: they would have to choose between dominance in a weak organization and a smaller share in a strong and authoritative organization. The motivation, of course, is not very convincing, because in such cases states are guided exclusively by simple mathematical logic.
However, Rodrigo de Rato showed serious ambitions by attempting to approve the essence of the new formula at the IMFC meeting on Saturday. It is not known what he was counting on, but at least three major countries came out with open criticism, at the same time giving publicity to Mr. de Rato’s development.
Thus, in a statement by Alexei Kudrin it is said that Russia does not support the use in the formula of indicators that reflect the size of foreign trade, “contain numerous repeated calculations and artificially create unilateral advantages for a small group of countries.” Obviously, we are talking about benefits for EU countries. Mr. Kudrin emphasized that the main role in the new formula should be played by a mixed GDP indicator, in which the share of GDP at purchasing power parity would be significant.
The finance ministers of India and Brazil made much stronger statements, with the latter once again threatening the creation of an “alternative” currency board in South America.
Apparently, the threats worked. The final communique says all the right things about the need to strengthen the voice of emerging economies and even low-income countries. As for the specifics, they are set out almost in the words of Mr. Kudrin: the IMFC supported “the inclusion of GDP in the new formula as the most important variable,” taking into account the significant role of GDP at purchasing power parity.
An agreement on the new formula should be fully ready by the spring 2008 session of the IMF Board of Governors. Thus, Mr. Strauss-Kahn will have to mobilize all his diplomatic skills to bring the parties to consensus. The cavalry style in which the Frenchman conducted his election campaign would clearly be inappropriate here.
Russian view
The discussion of the issue of revising shareholder quotas once again demonstrated the new role played in the IMF by Russia and Alexey Kudrin personally. The August nomination of Josef Toszowski as an alternative candidate for the post of Managing Director of the IMF, the current firm “no” to the unfair mechanism for revising quotas, and other, less noticeable steps indicate that Moscow has taken a consistent and interested position in the affairs of the fund.
Russia's new role is also discussed in relation to the World Bank. On Friday, Mr. Kudrin held negotiations with the new head of the World Bank, Robert Zoellick, with which both were, apparently, highly satisfied. Mr. Zoellick noted that now we are talking about adjusting relations in connection with economic successes in Russia and its significantly increased financial power. In this situation, the World Bank will focus its attention on technical assistance programs for Russian regions.
In the presence of journalists, Messrs. Kudrin and Zoellick signed an agreement under which Russia will allocate $20 million to a program to combat malaria in Africa. After which the head of the World Bank himself returned to the question of Russia’s new role, saying: “The main thing (what determines this role - Ed. ) is the situation in which we see the generosity of Russia and its people.” Zoellick emphasized that Russia, which has received huge windfall profits thanks to the oil market, is “sharing with other countries that are not so lucky.”
It is quite possible that Alexei Kudrin will have the opportunity to confirm Russia’s new role in the issue that the G7, led by Washington, is persistently bringing to the fore. We are talking about the so-called national wealth funds accumulated by a number of developing countries and resource-exporting countries.
On Friday, the issue of such funds became the topic of a special discussion at a meeting of the “financial seven” with the participation of Russia, China, Korea, Kuwait, Norway, Saudi Arabia, Singapore and the UAE.
Alexei Kudrin, who participated in this meeting, then explained to reporters: some G8 countries are expressing concern that when investing wealth funds, their owners “may be guided not only by issues of profitability, but also be subject to political decisions to put control over large global companies or infrastructure facilities in various countries.” The concern stems from the impressive size of the accumulated funds and their increasing trend: by 2012, the total volume is projected to grow to about $10 trillion, up from the current $2-3 trillion. Accordingly, as Mr. Kudrin explained, “the opportunities for such transactions are expanding.”
Russia, as is known, intends to allocate a national welfare fund from the stabilization fund (which has already accumulated about $140 billion). According to the forecast of the Ministry of Finance, in a year it could amount to about $20 billion, which is expected to be invested in foreign financial assets. According to Mr. Kudrin, Russia opposes any restrictions on countries' placement of sovereign wealth funds, as some G8 members insist: “The placement of sovereign wealth funds must be subject to the general rules of free movement of capital. We want there to be no restrictions." At the same time, the Russian minister does not reject the possibility of developing general, non-binding recommendations for investing funds. “Development of clear recommendations... is possible in principle, but only if it suits us, the countries that place the funds,” Mr. Kudrin said.
The management of wealth funds is not the only issue on which there may be disagreement between Russia and other G8 countries. G7 financiers on Friday instructed the FATF to take action to protect the international financial system from money laundering and terrorist financing risks associated with Iran. “Following two unanimous UN resolutions related to Iran's nuclear and ballistic missile programs, the FATF is encouraged to identify the risks of illicit financing associated with Iran, and for financial institutions to take these risks into account,” the G-7 statement said.
It is obvious that Washington is looking for ways to apply economic sanctions to Tehran - formally or informally. According to Vremya Novostey, in Washington, the head of the Central Bank of Iran, participating in the annual meeting of the IMF and the World Bank, met with one of the senior Russian officials. It is possible that at some point Tehran may turn to Moscow with a request to use the capabilities of the Russian financial system to carry out certain international transactions. And although the Kremlin has already taken many steps towards the regime of President Ahmadinejad, Moscow would most likely prefer not to receive such a request.