Syria, emerging market turmoil put U.S. in G20 hot seat

By Douglas Busvine

MOSCOW (Reuters) - The Group of 20 cut its teeth in the global financial crisis of 2009, achieving unprecedented cooperation between developed and emerging nations to stave off economic collapse which has not been matched since.

Four years on, shifts of power and money - led by capital flight from emerging markets - and gaping divisions over Syria will test the resolve of the G20 leaders when they meet in Russia's second city of St Petersburg this week.

It is the very breadth of the forum, which groups developing and developed economies accounting for two-thirds of the world population and 90 percent of its output, that makes it hard to forge a united front.

"There is a tremendous vacuum of policy coordination, I don't think I've ever seen it this bad," one global economist, who spoke on condition of anonymity, said as he looked ahead to the two-day talks starting on Thursday.

U.S. President Barack Obama, who has already pulled out of a meeting with host President Vladimir Putin after a falling out between Washington and Moscow, might be forgiven for wanting to skip the gathering altogether.

Obama has struggled to rally Western support for military action against Syria over what Washington believes is the killing of 1,400 people in a chemical weapons attack.

Britain, a generally reliable ally, pulled back after a parliamentary revolt last week.

Obama's request for Congressional approval for the use of force has, meanwhile, raised eyebrows in the Kremlin for appearing to show weakness after the forceful U.S.-led action in Iraq and Afghanistan over the past decade.

Putin wants Syria put on the G20 agenda and is unlikely to pull any punches less than three months after being cast as a pariah over Syria at the last big meeting of world leaders - the G8.

"It's not a substitute for the U.N. Security Council, it can't take decisions on the use of force. But it's a good platform to discuss the problem. Why not take advantage of this?" he said on Saturday.

"Is it in the United States' interests once again to destroy the international security system, the fundamentals of international law? Will it strengthen the United States' international standing? Hardly," he said.

Syria and Russia say rebels carried out the gas attack to draw in foreign military intervention. Moscow has repeatedly used its U.N. Security Council veto to block action against Syria.

The conflict will be discussed on the sidelines of the summit by at least some G20 foreign ministers, who are not usually invited to this annual gathering. But it is not clear whether it will be put to the leaders for formal discussion.

With Obama on the road, United Nations inspectors still to report on the Damascus deaths and Congress due to vote next week, air strikes are not expected for now despite a scare over an Israeli test missile launch on Tuesday.

A few numbers, meanwhile, reveal a strategic disconnect: U.S. defence spending accounts for 39 percent of the global total, nearly twice its 22 percent share of the world economy.

Others are weary of costly military interventions.

DOLLAR DOMINANCE

It is the dollar's outsized role in the global financial system - it counts for 62 percent of central bank reserves - that has been in part responsible for a roller-coaster ride on markets throughout Russia's G20 presidency.

The year started with controversy over whether the aggressive fiscal and monetary stimulus launched by Japanese Prime Minister Shinzo Abe was an act of "currency war" designed to bring about a competitive devaluation.

"Abenomics" got a free pass in the end when finance ministers met in February. The Federal Reserve had, after all, been buying up $85 billion worth of bonds every month to try to restore the flow of affordable credit to the U.S. economy.

When Chairman Ben Bernanke cautioned in May that the Fed would slow the printing presses as the U.S. economy recovers, the cheap dollars that had flooded emerging markets turned tail.

Countries running external and fiscal deficits, above all India, have been most exposed.

"We expect an intense debate about the possible side effects of the U.S. withdrawal from the policy of quantitative easing," Russia's G20 summit coordinator, or 'sherpa', Ksenia Yudayeva told a news briefing.

There has been no sign of the other members of the BRICS emerging markets caucus - Brazil, Russia, China and South Africa - rallying to India's side after Delhi called last Friday for joint currency intervention.

"The emerging markets pressures and volatility are a reminder that the recovery could easily be capsized," said Neil MacKinnon, a global macroeconomic strategist at VTB Capital, a Russian investment bank.

Yet the BRICS have struggled to reach agreement on founding a joint development bank, with a deal months or even a year away, while the idea of creating a shared currency intervention pool has faded.

DELIVERABLES

No summit would be complete without so-called 'deliverables', and leaders are expected to sign off on proposals to fight tax avoidance by multi-national companies that were unveiled in July.

An initiative to refine regulation of the $630 trillion global market for financial derivatives - such as futures, options and swaps - to prevent a possible markets blow-up will also be presented to summit leaders.

The G20's Financial Stability Board (FSB) - not to be confused with the Russian secret service which shares the same initials - will also give the so-called 'shadow banking' sector until 2015 to comply with new global rules.

While the United States and China have taken aggressive action to spur demand, Europe has been slower to let go of austerity and the continent's paymaster, Germany, resists signing a blank cheque to backstop a euro zone banking union.

A fragmented banking system could hurt growth if countries fail to overcome their differences over 'too-big-to-fail' banks that run into trouble, Bank of England Governor and FSB Chairman Mark Carney said this week.

Missing from the G20 debate is leadership on the pressing issue of how to wean the world off its reliance on one currency.

"The dollar, and by extension quantitative easing, are key for markets," said Neil Shearing, at Capital Economics in London. For emerging markets, he said: "The only thing that's worse than a weak dollar is a strong dollar."

(Additional reporting by Lidia Kelly, Alexei Anishchuk, Gernot Heller, Tetsushi Kajimoto and Huw Jones. Writing by Douglas Busvine, editing by Timothy Heritage/Mike Peacock)