Martin Gilman, the Head of the SU-HSE Centre for Advanced Studies, comments Russia’s anti-crisis efforts within G20 framework

By now almost everyone on the planet has felt to one degree or another the most virulent global economic crisis since the Great Depression. Its largely unanticipated destructive force has humiliated once-mighty financial institutions and companies, humbled economists, devastated investors, scared consumers and challenged public authorities around the world.

It is natural that at a time of such confusion and even desperation many people look to their leaders for solutions. This is the context in which the much-hyped expectations of many are focused on the second summit of the Group of 20 countries in London on April 2. But more likely than not, President Dmitry Medvedev will return from the summit in three weeks with little to show for the G20's anti-crisis efforts.

The G20 "sherpas" will meet on Thursday in London to prepare the summit agenda. Undoubtedly, they will once again produce empty pledges to avoid protectionism, coordinate policies, strengthen regulatory oversight and reform international financial institutions.

Regarding the threat of protectionism, the G20 pledge in November to forego any protectionist actions and promote the Doha Round of trade talks was ignored, but nonetheless, it is likely to be repeated this time along with a promise to monitor such measures. Much effort will be expended on the search for scapegoats or secondary issues like tax havens. There will be more calls to coordinate regulatory regimes, but U.S. authorities have already insisted that they will continue to conduct their own regulation of financial institutions and markets.

In any case, it is hard to conceive that this heterogeneous group could ever agree on much. Its membership reflects geographical and social factors as much as economic size. It excludes some of the world's 20 largest economies, such as Iran and Taiwan, while smaller economies, such as Saudi Arabia, Argentina and South Africa, are included.

The preponderance of European countries in the G20 is reflected in the stalemate on reform of the International Monetary Fund. Other than calls for surplus countries to place more of their money for use in its lending operations, there is unlikely to be any real steps to improve governance by shifting control of the IMF from overrepresented European countries to China, Russia and South Korea. Despite some hypocrisy, none of the existing shareholders seems willing to cede its share or, more sensibly, to consolidate the European representation into a single vote.

Thus, Russia, China and other major emerging economies, the new creditor class of the 21st century, have been largely disenfranchised by the "debtors" who control the international financial and economic institutions. The only way that the G20 can really make a difference is by recognizing this new reality and having the political courage to start a realignment of power and control to reflect the tectonic shift in relative global economic forces. Unlikely as it may seem, this is a chance for Medvedev to display real leadership.

The United States is also underrepresented — at least relative to its share of global gross domestic product — but it could still try to make common cause with the new creditors. It is hard to imagine that President Barack Obama would be willing to offend his host and allies on one of his first forays into foreign affairs.

Ironically, if the IMF's shareholders had taken Russia's proposal in 2006 to appoint the experienced Czech Josef Tisovsky as head of the fund rather than French politician Dominique Strauss-Kahn, perhaps it would now be in a better leadership position in the current crisis. But Russia's views are not taken seriously, not least because they could upset the long-standing predominance that the Europeans enjoy. And no matter how concerned the United States is about the crisis, a real reform of the IMF and other institutions is just politically too costly.

In London, the heads of government will also discuss their numerous proposals to revive their economies through tax cuts and spending. But any proposal that binds stimulus packages to a percentage of GDP is likely to meet resistance.

This is because the crisis manifests itself in different ways in different countries. There is little need to dwell on the adverse impact of the crisis on Russia. The collapse of oil prices, bank credit, government revenues and the ruble together underscore the country's economic predicament. But unlike all the other G20 economies where stagnation is the primary concern, Russia is the only one trying to contend with stagflation — that lethal combination of economic stagnation and inflation.

In the context of any coordinated effort to stimulate the global economy, as White House economic adviser Larry Summers called for earlier this week, Russia's hands are tied. Unlike many countries where a major expansion of public spending is constrained by large debt burdens, Russia — which has not forgotten the lessons from its 1998 default on domestic ruble-denominated bonds — has little sovereign debt (4 percent of GDP at the end of 2008).

Instead, a Russian effort to expand government spending, as its contribution to boost to the global economy, is restricted by inflation. Russia's inflation rate rose to a four-month high in February as the weaker ruble drove up the price of imports. The annualized rate jumped to 13.9 percent from 13.4 percent in January. February's increase in inflation reflects the ruble's sharp but controlled depreciation of about 35 percent between Nov. 11 and Jan. 22.

These devaluation effects could last through April before we see what impact the decline in real income and shrinking money supply will have on dampening inflation. It is by no means a given that the official inflation forecast of 13 percent for 2009 will be realized. Much will depend upon how the authorities revise the 2009 budget.

Russia is already making too large a contribution in the G20 framework in terms of relative fiscal effort. Its budget balance — and hence its contribution to real GDP — could swing from a budget surplus of 4 percent of GDP in 2008 to a budget deficit of as much as 8 percent of GDP in 2009. This 12 percentage-point injection, envisaged by Finance Minister Alexei Kudrin, is almost twice as much as contemplated by the United States. The net result will be sustained inflation and poorer medium-term prospects.

Kudrin should aim for a much smaller deficit, and he would still be able to say that Russia is doing more than most to boost the global economy.

Martin Gilman for the Moscow Times