The financial crisis has exposed the weaknesses in a number of national and international financial institutions. It has also created the opportunity to develop an integrated regulatory framework for the global financial sector. However, it appears that such a framework remains a long-term goal for most countries, and that the short-term result of the crisis will be for each state to pursue its own immediate interests.

The Carnegie Moscow Center hosted J. Andrew Spindler, president & CEO of the Financial Services Volunteer Corps, Zdenek Turek, president of ZAO Citibank Russia, Citi country officer and division head for Russia, Ukraine and Kazakhstan, Carnegie’s Dmitri Trenin, and Evgeny Gavrilenkov, managing director of the Troika Dialog Group, to discuss the effects of the financial crisis on both the global economy and global politics. Natalia Nikolayeva of Citi moderated.

The Financial Crisis

The crisis, which emerged in 2008, can be traced back to the ubiquitous negative interest rates and loose monetary policy of the first half of the decade, said Gavrilenkov. These two factors encouraged the excessive risk-taking that ultimately sparked the larger crisis. While extensive stimulus packages in European countries and the United States may have limited the extent of the damage done by the crisis, they have also made it difficult for countries to find the financial leverage necessary to improve their long-term economic conditions, especially when considered alongside preexisting state deficits.

Varying Effects of the Crisis

While the effect of the financial crisis has been global, the extent of the damage varies across nations.

  • The United States: For the United States, the most pressing problems have been sharp increases in unemployment rates and the low availability of credit.
  • Russia: In Russia, the government has been forced to deal with financial institutions whose unexpected weaknesses have been revealed by the crisis. These institutions are incapable of effectively addressing fallout from non-performing loans.
  • China: The repercussions of these non-performing loans are an increasingly pressing issue for China, which has also been forced to delay much-needed structural economic reform in favor of injecting the economy with a heavy stimulus aimed at maintaining growth and counteracting the country’s current reliance on exports and large state-owned corporations. 
  • The European Union: While it appears that the worst of the recession may be over for the United States, Russia, and China, it may well be that the European Union will emerge from the crisis most changed.

Change in the European Union

In the wake of the financial crisis, it has become clear that the European Union’s financial institutions are not yet capable of developing a coordinated and effective response to economic problems of such magnitude. It appears likely that the EU will have to develop new legislation aimed at facilitating greater cooperation on economic issues, stated Turek. Such legislation will most likely:

  • Tighten regulations for financial institutions and corporations;
  • Develop more extensive transparency requirements;
  • Promote the G20 over the G8 as a forum for international negotiation;
  • Increase emphasis on productivity as a means of economic growth, rather than exports or government stimulus.

If these reforms are to be successful in remedying the effects of a crisis that has affected citizens across the globe, concluded Turek, their overarching goal must be to improve living standards and address the inequalities that past economic policy has thus far been unable to offset.

China and Russia

While Russia has been hit hard by the financial downturn, China has emerged from the crisis with new confidence and increasingly evident ambitions to join the ranks of the major powers, argued Trenin.

  • Isolation: China was relatively isolated from the crisis because its financial markets are not well-integrated with the rest of the world. Also, Chinese bank regulators take a very conservative approach to many of the financial products whose use contributed to the crisis, many of which are not yet permitted to be used there. This isolation has enabled China to assume a newly emboldened position on the global stage.
  • Russia: The crisis has highlighted the growing contrast between the rise of China and the relative decline of Russia, its neighbor and competitor.
  • Global Position: Since the beginning of the crisis, China and Russia have acknowledged the growing importance of the G20 and both have sought to improve their relationships with the United States. Both states appear to primarily be concerned with securing a place in the group of major economic and political powers.

Regulation of the Global Financial Sector

The crisis has created an ideal opportunity for the development of a common international framework capable of promoting equitable growth and supporting the application of new technologies in less-developed countries, suggested Spindler.

  • Risk-estimation: Such a framework could facilitate more accurate estimations of risk and extend regulatory oversight to all the activities of the global financial sector. This could provide a shield against future economic instability, or at least a mechanism that could deal with it more effectively.
  • The Role of the G20: While the development of such a framework could be achieved through the G20, such negotiations would be complicated and new regulations would take a long time to emerge, if they emerged at all.
  • Great Powers: The reality is that major change in the way the global economy is regulated will only happen through agreements among the major powers, asserted Trenin. While both Russia and China are jockeying to become a leading part of this group, no state or international institution has thus far proved willing or able to supplant the leadership of the United States.

The financial crisis has demonstrated that the development of international economic regulations and institutions lags behind that of international economic integration and global market growth. While the crisis seems to have created strong incentives for the development of a more comprehensive regulatory framework that would facilitate equitable development and renewed focus on raising global living standards, such vast changes will only be achieved through consensus among the world’s most influential states. For the moment, most countries appear to be putting the state of their own financial institutions and economies first, in the hopes that international consensus on matters of a financial regulatory nature will emerge over time.