Time to Rejoin the International Community

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Prime Minister Vladimir Putin recently said that the financial crisis has undermined confidence in the United States as the leader of the free world and destroyed trust in Wall Street -- perhaps forever. It is an amusing assertion. Even though the debacle began in the United States, the dollar has been rising, gaining around 15 percent against the ruble. Investors have been dumping emerging governments' Eurobonds and buying U.S. Treasury obligations -- still the safest financial asset around.

The Kremlin risks emulating another arrogant government, the administration of U.S. President George W. Bush. Until recently, Bush and his economic advisers kept insisting that U.S. economic fundamentals were sound and that the financial crisis would take care of itself.

Russian leaders seem to think that their country will not only avoid the coming global economic calamity, but could actually benefit from it. In reality, Russia is facing an imminent downturn at a time when it is unprepared, isolated and with business and investor confidence badly shaken. There are troubling signs that Russia has been excluded from the important international decision-making process regarding key economic issues.

Russia still has plentiful financial resources, consisting of Central Bank reserves and money in its stabilization funds. But the time to act is now, before these funds are squandered in futile haphazard efforts to stabilize the domestic economy.

The outlines of the worldwide economic crisis are starting to take shape. The immediate concern is the global financial system. But beyond looms a potentially nasty international recession. Over the past decade, global economic growth has been fueled by a credit splurge that allowed the United States to consume much more than it produced. This spending binge was collateralized by rising real estate prices. Now, one in six U.S. households owes more on its home than what the home is worth, which means that the economic paradigm will have to change. If the United States is forced to live within its means, the U.S. economy could contract by as much as 10 percent over the next year.

The consequences for the rest of the world would be devastating. China will likely face an overproduction crisis, and Russia's export earnings will drop when demand for oil and other commodities weakens. Russia could find itself isolated, shunned by international investors and unable to borrow at affordable rates in a risk-averse environment when credit is tight.

As a first step, Russia needs to rejoin the international community. An opportunity exists because of the ongoing financial crisis and the growing realization that the $700 billion package provided by Washington is inadequate. It is the case of one pauper, the U.S. government, bankrolling another, the financial system. The financial crisis was created by excess credit, and it cannot be resolved by borrowing even more money. The U.S. budget deficit, after rising to a record $455 billion in the fiscal year ending Sept. 30, may reach as much as $1 trillion this year.

Washington has rejected proposals by the European Union to fundamentally reform the global financial system, but its hand may be soon forced. Russia should then spearhead an effort by Japan, China, Saudi Arabia, Norway and other countries holding large amounts of dollars to set up an international fund that would recapitalize the global banking system by taking an ownership stake in financial institutions. This will address a key global imbalance -- namely the severe overhang of dollars, as some $3 trillion is currently held in central bank vaults and sovereign wealth funds around the world.

If this constructive proposal were to be backed by Moscow's financial muscle, Russia could play a key international role in mitigating the global financial meltdown.

Alexei Bayer, a native Muscovite, is a New York-based economist.