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I recently spent a few days in Moscow meeting with a variety of economic and financial officials and analysts, both in the public and private sector.

Until July of this year, Russia was rosy: It was growing at an annual rate close to 8%; oil prices were peaking at $140 a barrel; the country was running a large fiscal and current account surplus; it had a war chest of $600 billion-plus of foreign reserves; and its stock market, bond markets and currency values were strong. Policy makers were thinking of turning the ruble into a major reserve currency, at least for the CIS bloc.

This economic and financial success led Russia to flex its geopolitical muscle, challenging the U.S. on a number of political and military issues and using its energy power as an instrument of foreign policy in its relations with the Eurozone and its former Soviet neighbors. The peak of this resurgence of the Russian bear came during the August war with Georgia, when Russia flaunted its military power as the U.S. looked impotent in its inability to defend an ally.

But what a difference a short time makes. Six months later, Russia is in deep economic and financial trouble.

The S&P has just announced that it has lowered Russia's foreign-currency credit rating by one notch from BBB+ to BBB. In less than six months, oil prices have fallen to under $50 a barrel (from the $140-plus peak of July). The stock market has fallen by over 60%, and on some days it has been shut down to prevent a free-fall. The current account surplus has turned into a near deficit and a sure deficit by 2009. The country has experienced a capital flight of over $100 billion and has lost about $150 billion of foreign reserves (now down to about a $450 billion level). It is facing massive external debt-financing problems as its banks financed their lending with foreign currency borrowings and its corporate firms financed massive expansion with foreign currency debt. It is now desperately trying to prevent a sharp depreciation of its currency by aggressive foreign exchange intervention. It may face a large fiscal deficit (2% of GDP) next year, and its GDP growth rate is sharply slowing down, leading the World Bank to predict a rate of only 3% in 2009--with leading local analysts predicting an actual recession (negative growth of as much as -2%) in 2009. (See the recent analysis by RGE's Rachel Ziemba for more on the risks of a hard landing in Russia.)

Given this sudden change in Russian fortunes, there are several key policy issues that the authorities need to deal with. Of course, given the external shocks (terms of trade worsening and a sudden stop of capital and credit), it was important to use the buffer of foreign reserves to avoid a bank run by providing liquidity and capital to banks--and by providing a fiscal stimulus to a country that is sharply slowing down.

But the key unresolved policy issue is what to do with the exchange rate. Until recently, Russia was on an effective basket peg (with 55% for the dollar and a 45% weight for the euro). But with oil prices now down over 60% from the peak of the summer, and with incipient current account and fiscal deficits and a likely recession in 2009, the currency is obviously overvalued. A reasonable estimate of the needed exchange-rate depreciation--with oil at about $50 a barrel in 2009--is 25%. But until recently, the authorities resisted the needed depreciation through aggressive foreign exchange intervention.

Wall Street was due for a letdown Tuesday, after gains in nine of the past 11 sessions and a batch of shaky profit forecasts late Monday. The decline, though steep, was relatively tame though, as stocks traded within a narrow range for much of the day.

A significant portion of the action took place in the bond market, as investors sought to park their money in safer investments and ignored the prospect of minimal, or even nonexistent, returns. A $30.0 billion auction of one-month Treasury bills drew robust interest -- a bid-to-cover ratio of 4.2 -- despite a yield of 0.0%. After the auction, the bills were trading at a yield of 0.04%. Three-month T-bills were returning even less, with a yield down to 0.03%, from 0.11% Monday. (See "The Zero Percent Solution.")

The rush into bonds was set off by a day-long fade in U.S. equity markets. The Dow Jones industrial average lost 243 points, or 2.7%, to 8,691; the S&P 500 fell 21 points, or 2.3%, to 889; and the Nasdaq lost 24 points, or 1.6%, to 1,547. (See "Street Slides Back.")

Tech stocks were among the few winners, despite profit and sales warnings from semiconductor companies Texas Instruments (nyse: TXN - news - people ) and Broadcom (nasdaq: BRCM - news - people ), among others. The weaker global economy has crimped demand for their chips, leading to sharply lower fourth-quarter expectations. Texas Instruments gained 4.9%, and Broadcom added 7.0%. The Philadelphia Semiconductor Index, which tracks the pair and their fellow chip makers, rose 5.2%.

Profit-taking likely had some impact on Tuesday's broader decline, but optimism that President-elect Barack Obama's stimulus plans can spend the U.S. back into prosperity took a backseat, as certain early-cycle recovery stocks sank. Companies like FedEx (nyse: FDX - news - people ) and UPS (nyse: UPS - news - people ) are traditionally among the first to bounce back from economic downturns, but a sharply lowered forecast from FedEx Monday sapped investor hopes that such a rebound is already on its way. The parcel shipper said that although fuel pressures have eased, recessions around the world will take a heavy toll in 2009. FedEx shares lost 14.5%; UPS was down 7.0%. The Dow Jones transportation average, which counts both companies as well as airlines, railroads and trucking companies, slid 5.6%. (See "U.S. Recession To Span 2009, OECD Says.")

The rescue plan for Detroit's automotive industry appears to have paused, as lawmakers labor over the details of a proposal to lend General Motors (nyse: GM - news - people ) and Chrysler $15.0 billion of taxpayer money. A drafted plan from Democrats has been met with resistance, but congressmen still appeared confident that a bill will be passed this week. GM shares lost 4.7% Tuesday. Ford Motor (nyse: F - news - people ), which is not presently in danger of insolvency and thus not participating in this initial loan, slipped 4.4%.

NEW YORK (Reuters) - Dow Chemical Co (nyse: DOW - news - people ) said Monday it would close 20 facilities, divest several businesses and cut 5,000 jobs, or 11 percent of its global workforce, in response to the global economic slump.

Dow said the action, which comes less than a week after its U.S. rival DuPont (nyse: DD - news - people ) announced cutbacks, is an acceleration of its "transformational strategy" and will lead to annual cost savings of $700 million by 2010.

"We are accelerating the implementation of these measures as the current world economy has deteriorated sharply, and we must adjust ourselves to the severity of this downturn," Chairman and Chief Executive Officer Andrew Liveris said in a statement.

The Midland, Michigan, chemicals maker is also in the process of buying specialty chemicals maker Rohm & Haas for $15.3 billion, a move the companies said would yield $800 million in savings by 2010.

Dow will cut 5,000 full-time jobs, close 20 facilities in high-cost locations and sell non-strategic businesses. The company will also temporarily idle 180 plants and reduce its contractor workforce by 6,000.

Fears that the year-long U.S. recession will deepen prompted DuPont to cut 2,500 jobs and phone company AT&T to eliminate 12,000 jobs.

Photo Illustration: Arthur Eves/BW; Image: Getty Images

The U.S. government is poised to keep any of Detroit's automakers from going bankrupt, and lawmakers and the companies are looking for every avenue for Uncle Sam to provide the companies with fresh capital (BusinessWeek.com, 10/28/08). The moves, expected to help General Motors (GM) pull off its acquisition of Chrysler, may require passing new legislation during next month's lame-duck session of Congress.

Michigan's senior U.S. Senator Carl Levin told BusinessWeek on Thursday, Oct. 30, that one new and surprising avenue being discussed to keep the companies solvent is passing an amendment to last month's continuing budget resolution bill signed by President Bush, which also included a $25 billion loan package for auto companies to retool assembly plants to make more fuel-efficient vehicles. The amendment, said Levin, could seek to offset billions the automakers have already spent to develop hybrid, electric, and smaller cars to market in the next few years, rather than restricting the loans to offset investments in 2008 and 2009. Such a move would be an almost instant cash infusion for GM, Chrysler, and Ford (F).

The scramble is on for the quickest source of funds. When GM Chief Executive G. Richard Wagoner Jr. met with government officials this past week, he found a hospitable reception. But GM sources say no conclusion was reached on an aid package.

Moving the Money Fast

That's why Levin and other politicians in states whose economies rely on the auto industry are trying to hurry things along. Levin said efforts by his office and the rest of the Michigan delegation, backed by several governors and lawmakers in other states with auto and auto-parts factories, center on either getting the $25 billion to the automakers faster than is called for in the bill, or getting them help along with banks and insurance companies in the Emergency Economic Stabilization Act (EESA) passed earlier this month. "Tapping into the Economic Stability Act has an advantage in that [the Treasury Dept.] and the Federal Reserve have the flexibility, but the advantage of the continuing resolution is that it is targeted at the auto industry," said Levin, who is polling far ahead of his Republican opponent in Tuesday's election.

The Michigan senator said passing new legislation next month would be "complicated." But, he added, "My job is to keep as many options on the table as possible."

If money isn't secured by the end of Congress' lame-duck session in November, the Chrysler deal could be in jeopardy, sources close to the negotiations say. Meantime, lawmakers are trying to find a way to give the automaker a hand without setting a precedent that the government is ready to bail out every struggling company in the nation.

And it's not just the U.S. government that's weighing rescuing its automakers. On Oct. 29, representatives from the European Union announced it would back a request for $50 billion in low-interest loans for its struggling auto sector (BusinessWeek.com, 10/30/08). Such a package, if enacted, could give a competitive advantage to European carmakers—adding pressure for Congress to come up with a U.S. solution.