The Russian economy is the G-20’s worst performer, contracting by 3.8%.  President Vladimir Putin claims that his economic policies remain consistent; in fact, he has wisely changed course, limiting the damage that could have been done had he not.

Anders Aslund writes:  At the end of 2014, Russia was seized by financial panic. The Central Bank of Russia (CBR) responded to collapsing oil prices by floating the ruble, which immediately lost half its value. Desperate Russians rushed to buy whatever they could before their money became worthless. Inflation shot up to 16%.

In 2008-2009, the Russian Central Bank CBR pursued a policy of gradual devaluation, bailing out all big state-owned and private corporations, regardless of their performance. This time, Russia has maintained a floating exchange rate, conserving its reserves. The CBR stabilized the market by shock-hiking its interest rate, and has since reduced it gradually, as any sound central bank would.

Russia did adopt an anti-crisis stimulus package; but, at 3.5% of GDP, it was just one-third the size of the 2008 package. And while the Russian government singled out some enterprises as “strategic,” it actually gave them very little money. Many big companies, most notably in the construction and aviation sectors, were forced into bankruptcy. Creative destruction  has been revived somewhat. Life is a little less secure for Russia’s rich.

Since the expropriation of Yukos Oil Company in 2004, Putin’s policy had been highly benevolent to large state-owned firms. The state financed their purchases and investment projects with seemingly inexhaustible oil revenues. But now, with oil prices down sharply, Russia’s export revenue has plummeted by 30% this year, and state funds have become very scarce.

Something had to give, and, to Putin’s credit, it was not fiscal conservatism. This year, Russia’s budget deficit is expected to be just 2% of GDP, rising to 3.5% in 2016 – a remarkably strong performance given that the country has had to weather a trade shock and international financial sanctions. Next year, the government is set to use $40-45 billion of its reserve fund for budget financing.

Accomplishing this has required Putin to abandon some of his regime’s taboos. For the first 15 years of Putin’s rule, Russians’ standard of living rose steadily; but it has fallen sharply since November 2014. Real wages are set to plummet by 10% this year. Real pensions are also declining, and spending on health care and education is set to fall by 8% next year.

State-owned firms have been affected as well. Gazprom, Rosneft (which absorbed Yukos), and Russian Railways have been publicly begging for government money. Last December, Putin accepted a complex financing scheme for Rosneft. But by August, it was clear that all three corporate giants would receive only a small share of what they wanted.

Given Western financial sanctions, Putin’s effort to conserve state funds is entirely sensible. Still, the significance of these changes should not be exaggerated. Their macroeconomic impact is substantial, but no systemic reforms are on the agenda. Unlike China, Russia has made no attempt to rein in rampant corruption at the top. Nor has anything been done to strengthen the rule of law. Tens of thousands of presumably innocent Russian businessmen sit in pretrial detention because security officials want to seize their companies. Protectionism proliferates as Russia imposes ever more trade sanctions.

The big question is how Russians will respond when they realize that the decline in their standard of living is not temporary, as it was in 1998. In 2014, Russia’s GDP was $2.1 trillion (at the current exchange rate). It has plunged to $1.1 trillion. These numbers do not reflect purchasing power, but the Russian middle class measure their salaries in dollars. So far, public reaction has been muted, but a two-week protest by Russia’s truck drivers over a new highway toll suggests that popular quiescence may not last.

Russia’s economy was stagnating even before the bottom fell out of global oil prices, and most experts expect energy prices to remain low for years. This confronts Putin with a challenge he has never faced: leading Russia at a time when there is no light visible at the end of the tunnel.

Does China Belong at the Grownups table in international finance?

Paola Subacch writes:  The IMF has given a huge vote of confidence in China’s capacity to play a major role in international finance.

Many market participants, however, remain skeptical about the decision. Does the renminbi really belong in the same category as the US dollar, the euro, the Japanese yen, and the British pound in the international monetary system?

No doubt, China has made remarkable progress over a relatively short period. Since 2009, the share of China’s trade settled in renminbi has increased from less than 1% to more than 20%. And the renminbi now ranks fourth among the world’s currencies used for international payments.

But the renminbi’s 3% share in global payments lags far behind that of the dollar (45%) and the euro (27%). Moreover, growth in the use of the renminbi to settle trade has been concentrated largely in the Asia-Pacific region, and specifically in transactions between China and its neighbors. And demand for renminbi-denominated assets remains relatively low, with a mere 1.5% of total renminbi bank deposits held outside China.

The contrast between the renminbi and its SDR counterparts is stark. The renminbi offshore bond market amounts to just 0.5% of the world’s total, with 40% issued in dollars, 41% in euros, nearly 10% in pounds, and 2% in yen. The value of loans denominated in renminbi – CN¥188 billion ($29.2 billion) – is tiny, especially when one considers that almost 50% of total international banking liabilities are denominated in dollars, approximately 30% in euros, 5% in pounds, and about 3% in yen. And the renminbi accounts for 0.6-1% of global foreign-exchange reserves held by central banks, whereas the dollar and the euro account for 62% and 23%, respectively.

In short, unlike the rest of the currencies in the SDR basket, the renminbi is an international currency in the making, just as China is an economic and financial power in the making. Indeed, like most developing countries, China remains an “immature creditor” that lends mainly in dollars; and if it needed to borrow in international markets, it would have to issue most of its debt in dollars, not renminbi. Clearly, China’s standing in international finance does not match its status in international trade.

Nonetheless, there is a distinct sense that the renminbi will become a key player in global financial markets. After all, unlike other developing countries – even large ones like Brazil, India, and Russia – China has an economy that is large enough to provide critical mass to its currency’s development.

Furthermore, Chinese leaders are determined to push through reforms – especially of the banking sector and state-owned enterprises – that will help drive forward this development. They have made it clear that one of their key goals for the next five years is to narrow the gap between the international standing of the renminbi and that of the world’s “great currencies,” as they promote use of the renminbi far beyond the Asia-Pacific region.

It is important to note, however, that China’s leaders do not seem to be angling for the renminbi to replace the dollar as the dominant international currency. Their approach – based on the belief that a more diversified, and thus more liquid, international monetary system would contribute to a more balanced and less volatile global economy – is more pragmatic. Anticipating a shift from a dollar-based (and, more broadly, US-dominated) system toward a multi-currency, multipolar system, China’s leaders are laying the groundwork for their country (and its currency) to grasp one of the positions at the top, alongside other great powers.

While some countries – the United States and Japan, in particular – are far from enthusiastic about that, it is difficult to deny what seems inevitable (neither country formally opposed the SDR decision when it came). And, as China gains more financial clout, its role in global economic governance will undoubtedly grow as well.

Given all of this, it is unsurprising that the reform of the international monetary system and its governance will feature prominently at next year’s G-20 summit, hosted by China, which will hold the group’s rotating presidency. It is not yet clear how China will shape the debate. But the mere fact that it will happen at the G-20, rather than at the long-dominant G-7, sends a clear message that the global economic and monetary system is changing for good.

Two women are instrumental in handling the EU economy.  The European Union passed the first in a series of critical reforms, establishing a new centralized supervisory authority over the monetary union’s largest banks. In October 2014, European Central Bank will have access to financial data for banks across the continent. This authority will be used to identify bank weaknesses before they threaten the EU, as they did during the European sovereign debt crisis.

It’s the first of three pillars that European leaders say would guarantee a similar crisis doesn’t occur in the future. The other two – the creation of a joint deposit guarantee account and the authority to wind down banks with a unified financial backstop – will be considered in the coming year. The passage of the first pillar is another sign of economic progress for a continent where the news has been bleak for years. The EU and the world have two people in particular to thank for that progress: German Chancellor Angela Merkel and International Monetary Fund chief Christine Lagarde.

Is a climate deal good to go?  The European Union has formed an alliance with 79 African, Caribbean and Pacific countries in a final push for agreement at the climate summit COP21.  The new alliance has agreed a common position on some of the most divisive aspects of the proposed deal.  They say the Paris agreement must be legally binding, inclusive and fair – and be reviewed every 5 years.  The EU will pay €475 million ($522 million) to support climate action in the partner countries up to 2020.  The alliance has also agreed that the Paris text must include a “transparency and accountability system” to track nations’ progress on their climate pledges, and share best practice.