MOSCOW. (Vladimir Mytarev for RIA Novosti) - The World Economic Forum in Davos, which opens today, will discuss a potential global economic crisis.
In cooperation with Citigroup, Marsh & McLennan Companies (MMC), Swiss Re, Wharton School Risk Center and Zurich Financial Services, Davos experts have compiled a report on Global Risks-2008. The report says that in 2008 the world will face the highest level of economic and political risks in the past decade.
Prominent in the authors' concerns is the risk of a recession-inducing collapse of house and other asset prices in the United States, Britain and the rest of Europe. They rate the risk of this happening at 4.5 points, and the ensuing damage at five points.
It is hard to argue against this forecast. Western stock exchanges are down; oil prices have reached $100 per barrel and gold is approaching $1,000 per troy ounce. The world is gradually getting rid of dollar assets.
Against this background the report raises several important questions. Will a decline in the U.S. economy develop into full-scale recession? Will this process spill over to Europe? Will the economies of Asia and other developing nations be able to continue growing if exports to Western markets collapse?
Western experts appear to have been over-confident in ignoring global changes in the world economy. America's problems cannot be reduced to the mortgage crisis. Unemployment is growing, living standards have fallen, and consumption has fallen, threatening production.
Facing the threat of recession, the Bush administration is considering resorting to the same tactics it used at the very beginning of George W. Bush's presidency - the introduction of tax breaks for the population, to encourage spending, and tax benefits for corporations, to encourage investment. The idea is to shake up the financial system, which is short of liquidity.
But the very first attempt to introduce tax breaks has caused a storm at the American stock market and dealt a blow to share prices. It is worth recalling Finance Minister Alexei Kudrin's warning against unloading extra, phony money onto the market in response to demands to use the Stabilization Fund.
But it is still too early to talk about recession, although Bush's therapy is not likely to reverse the trend. Both Democratic presidential nominees speak in a similar vein. Barack Obama has come up with a plan to boost the U.S. economy with $120 billion. Hillary Clinton suggests the somewhat less expensive course of spending $70-$110 billion on immediate aid to hundreds of thousands of families affected by the mortgage crisis.
But whatever the rhetoric, I have no doubts that the U.S. economy will manage to overcome the crisis. A temporary fall in GDP growth and production will not destroy the world's most powerful and diversified economy.
But the liquidity crisis, which has affected the world's major banking systems, will not pass without a trace. People's trust in banks and banks' trust in borrowers has been seriously undermined. That is bound to change the scale of investments and deposits, as well as interest rates, ultimately affecting global growth rates.
Expenses of leading European financial institutions on loan capital have exceeded the cost of capital for their clients - for the first time since the corporate bond market accumulated a critical mass in 2000. This means that banks may tangibly change their credit and general financial policies - but how is as yet unclear.
It is rumored that many Western financial authorities will not come to Davos because they do not yet have answers to these urgent questions.
Now let's turn to the economies of the developing nations. Globalization was until recently recognized as shorthand for the penetration of Western (American, European and Japanese) business into the economies of all, or almost all, countries. But recently a reverse trend has emerged. A newly-rich has appeared, in the Persian Gulf countries, South-East Asia and BRIC ( Brazil, Russia, India and China). These vigorous youngsters have been impolitely telling the old money that playing by the same rules they have managed to snatch a much bigger slice of the economic pie.
Money from national welfare funds was unloaded on the world stock exchange to resolve economic problems, but proved unnecessary for the purchase of property. I believe this was one of the reasons behind the aggravation of the banking crisis, which broke out last summer as a result of defaulted mortgage repayments.
It would have been easier to borrow from developing countries, but this would have meant a change of ownership. The Western business elite did not choose to do this, and will not do so any time soon.
But the great anti-Chinese wall that America is feverishly erecting (as along with anti-Russian and anti-Arab walls) will not prevent the global shift of business from traditional centers to new places. Most probably, experts will find ways of using loans without compromising sovereignty, or anything else. It is no accident that many world leaders in the banking sector are searching for new capitals in the East despite dark rhetoric from Western governments about the political consequences of these trends.
Political motives dominate speeches by government officials, whether they are accusing Russia of using the energy card, imposing the semi-colonial Energy Charter or demanding that OPEC operate by American laws. Such confrontation will be very sensitive for the Russian economy, which has just started to kick its long-term oil dependency. Global oil prices continue to grow. In 2008 they will top $100 per barrel and reach about $125 by the end of the year. But it is dangerous to depend solely on the price of oil, which in turn depends on the steady development of the world economy.
Recently, industrialized countries have warned OPEC that they may reduce oil consumption. There will be no sharp reduction in the near future, but the use of alternative sources of energy is growing in many different fields.
The British airline Virgin Atlantic recently announced that in February it will fly a Boeing 747 from London to Amsterdam on biological fuel. A successful experiment may encourage an increase in the production of biological fuel. Well, nobody objects if Western countries, which have been good at producing fuel from corn and rape, establish their own organization of rapeseed oil exporters and start competing with hydrocarbons.
But at this year's Davos forum minds will be concentrated on the most urgent financial issues, and the energy problem will be forced into the background. For the time being, alternative sources are a threat to food, rather than oil producers. An increase in the production of biological fuel will result in a rapid growth in food prices, as crops that would normally go to food production are diverted to the refineries.
Besides, cultivated land is not unlimited. There are some examples of what happens - traditional beans were ousted by soya exported by Brazil to the United States. Construction of biological fuel plants may sharply increase prices for fodder and, hence, for meat.
The report covers the food problem as well. The probability of a serious food shortage for the poor in 2008 is estimated at three points. That doesn't seem too much, but this is a life-and-death issue for more than a million people.
For Russia, this does not look so tragic. But imagine a scenario in which oil prices are going down and the inflow of petrodollars is decreasing, while prices of meat, dairy products and other foodstuffs are going up. It may happen that the flow of petrodollars will dry up altogether.
Our foreign trade balance fell throughout 2007; recent figures show a drop of 8.5%, to $128.7 billion. If this trend continues we could have zero balance by 2012-2013.
We do not have too much time to change our export policies and offer the world market something other than oil, gas and other raw materials. We have the funds to restructure the economy. They are in the Stabilization Fund and our gold and currency reserves. We also have the trust of the world community, which is willingly giving us credit and making huge investments in our economy.
Vladimir Mytarev is an independent journalist.