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.

OPEC ends Cairo meeting without new output cuts

CAIRO, Egypt (AP) -- OPEC held off on announcing new oil output cuts on Saturday, but its alarm over falling demand and a slumping economy potentially laid the groundwork for a big reduction when it meets again in a matter of weeks.

Chakib Khelil, Algeria's oil minister and the group's president, said the Organization of Petroleum Exporting Countries ministers noted "with concern the continued deterioration of the global economic situation and its impact on oil demand."

The ministers, he said in a statement, agreed to "take any additional action ... to balance oil supply and demand, and achieve market stability" during their Dec. 17 extraordinary meeting in Oran, Algeria.

The outcome of Saturday's meeting in Cairo, convened about a month after the group decided to pull 1.5 million barrels per day of oil from the market, seemed unlikely to put a floor beneath crude prices that have fallen by around 60 percent from their mid-July highs of $147 per barrel.

Saudi Arabia, the 13-member organization's top exporter and kingpin, broke with its usual silence about specific prices and cited $75 per barrel as a favorable target. King Abdullah, in an interview with a Kuwaiti newspaper published Saturday, said that would be a "fair price" -- a message echoed by his top oil official in Cairo.

"Eventually, if we want the marginal producer to produce and help the world supply, then we need to give them a better price," Saudi Oil Minister Ali Naimi said.

But it was unclear how the group -- supplier of 40 percent of the world's crude -- could realize that target soon, given the lack of action at Saturday's meeting.

Some analysts questioned the wisdom of waiting in light of the current weak oil prices.

"Another dumb move by OPEC, unless of course they want lower crude oil prices," said Vincent Lauerman, OPEC expert and president of the Calgary, Canada-based consultancy Geopolitics Central.

Ahead of the meeting, the U.S. benchmark light, sweet crude futures contract settled a penny lower Friday at $54.43 in an abbreviated session on the New York Mercantile Exchange.

Others said the decision may have been a way for the group to push through a larger cut at the Algeria meeting.

Viewed in this light, the lack of a decision may be a strategic one aimed at preventing the group from suffering the same outcome it saw after the Oct. 24 Vienna meeting: Cut now and see prices fall again could further undercut its credibility, analysts said.

"They want to do everything they can to support prices, but do it in a way they can save face," said Phil Flynn, an oil analyst at Alaron Trading Corp. in Chicago. He expects the group to implement a cut of as much as 1.5 million barrels in Algeria next month.

If the Cairo gathering did not net a cut, it allowed the group to present a united front before a market that has recently been shrugging off their complaints about low prices.

Members were eager to brush aside persistent concerns that some countries fail to adhere to the production quotas OPEC has said it needs to be effective.

"We are assuming that everyone will be compliant -- hopefully 100 percent compliant," said Qatari Oil Minister Abdullah Bin Hamad al-Attiya. "Don't take me to the past, take me to the future."

In general, the oil ministers seemed optimistic about compliance with the previous round of cuts, announced in Vienna. Khelil put it at about 85 percent, others said 100 percent.

Venezuela has been one of the countries cited as being more liberal with its production -- a charge its oil minister denied on Saturday.

"Venezuela is fully compliant with the last cut decision in October," said Rafael Ramirez. "Venezuela's view is OPEC's view. We have to have a million barrels a day production (cut). But we have to wait for December."

Heading into the meeting, Khelil, the group's president, said a key aim was to assess the impact of previous reductions, while further studying the market and the impact the global economic meltdown was having on steadily falling oil demand.

He stressed the same point after the meeting, telling reporters that the current volatility merited a measure of caution and the need to wait until Algeria for a decision. The exit of speculators, who OPEC has said were the main reason behind the prices spikes earlier this year, will add some clarity to the oil market, he said.

"Now, we have real fundamentals," said Khelil, who added that the group is concerned about too much supply in the market and the difficulty some producers have in finding buyers.

Analysts said delaying a decision also gives prices room to deflate further, putting increased pressure on large nonmembers such as Russia to agree to join OPEC in any future production cuts while helping ensure compliance among its own members.

"It's easier to push other OPEC countries to comply if they start to see that yes, we could go lower," said Olivier Jakob of Petromatrix in Zug, Switzerland.

Russia has already indicated it backs OPEC's efforts to boost prices, though many in the market have questioned whether the oil giant would be willing to implement cuts of its own at a time when it sorely needs oil revenue.

Several OPEC ministers voiced hope that other oil producers would work more closely with the bloc, with Qatar's al-Attiya saying that "at the end of the day we need the help of everybody, including non-OPEC countries."

"Because if we produce oil and no one buys it, this is a concern. And this is what we're seeing today," he said.

Associated Press Writer Hadeel al-Shalchi contributed to this report.

OPEC oil ministers on Friday downplayed expectations of, but didn't dismiss outright, an immediate output cut as they faced a third test in as many months of their ability to engineer a rebound in oil prices.

The outcome of the hastily convened Cairo meeting Saturday, billed as a consultative gathering to assess the impact of earlier production cuts, likely hinges on a key issue with which the cartel has had a checkered past: unity.

Kuwaiti oil minister Mohammed Al-Aleem told reporters in Cairo that while the market was oversupplied, he believed there was "no need" for the Organization of Petroleum Exporting Countries to decide on cuts ahead of its regularly scheduled Dec. 17 meeting in Algeria.

But Rafael Ramirez, oil minister for price hawk Venezuela, later said the option remained to cut production by "at least 1 million barrels" at the weekend gathering. "Maybe it's necessary, a new cut," Ramirez said. He quickly added, thought, that such a decision could be taken now or next month.

The diverging takes highlighted the difficulty of the task facing producers of almost 40 percent of the world's oil.

"There is total confusion" among OPEC's 13 members, said Fadel Gheit, managing director of oil and gas research at Oppenheimer & Co. in New York. "These people ... really have no business model. They basically thrive when oil prices go up, and now they are crying uncle when prices go down."

And, down they have gone, in a financial avalanche triggered by demand destruction, itself sped along by a world financial meltdown that also threatens to cut deeply into OPEC member states' government budgets.

Whereas crude stood at about $147 a barrel in mid-July, it now hovers about $90 lower. On Friday, the U.S. benchmark West Texas Intermediate crude for January delivery was trading at down about $3 per barrel at about $51.

"They (OPEC) simply don't react quick enough, and prices keep going down," said Vincent Lauerman, OPEC expert and president of Calgary, Canada-based consultancy Geopolitics Central.

This meeting will come down to what kingpin and traditional price dove Saudi Arabia wants, he said.

Saudi oil minister Ali al-Naimi told reporters answers would come on Saturday.

The cartel has already held one emergency meeting - on Oct. 24 in Vienna - to try to halt the slide in prices with an announcement of a 1.5 million barrel per day drop.

It failed to support prices, and the cartel cobbled together the Cairo gathering on the sidelines of the Organization of Arab Petroleum Exporting Countries' meeting.

But members have been circumspect about expectations, leading some to speculate OPEC is staying quiet to maintain the element of surprise.

"As long as they do a substantive cut, they may be getting ahead of the curve, and should be cutting enough to get ahead of demand destruction," said Lauerman, citing about 1 to 1.2 million as the magic number.

That has been the figure most readily cited by those nations proposing cuts, including Venezuela which, like fellow price hawk Iran, need crude of about $90 per barrel to meet current spending needs aimed in part at propping up its domestically unpopular regime.

The two have found support from non-OPEC oil giant, Russia. Its president, Dmitry Medvedev, said Thursday his country would cooperate with the group to support prices.

Other OPEC members, such as Nigeria and Ecuador, face budget problems too, making them reluctant to implement more cuts that might shrink revenues further.

Nigerian envoy, Odein Ajumogobia, said the ministers were "just going to exchange ideas and views" at the gathering.

Kuwait's al-Aleem said current low prices benefit neither consumers nor producers and could undercut investments in future projects - a scenario that could lead to another spike down the road.

"We think a decision could be taken, but I think it will happen in Algeria," he said.

OPEC's last round of cuts would put its total production at about 30.5 million barrels per day, according to the IEA.

Unlike many of their fellow members, the Saudis are better positioned to cope with the drop in prices. The International Monetary Fund estimates Riyadh needs crude in the range of about $50 per barrel for 2008 fiscal accounts to break even.

While al-Naimi refused to tip his hand, an indication of the Saudi thinking may have emerged earlier this month when, during the Group of 20 meeting in Washington, King Abdullah pledged the kingdom would do everything in its power to help the global economy recover.

Higher oil prices would undermine that promise.

Also unclear, after two earlier cuts failed to push prices higher, is what the group can do without prolonging the global economic downturn.

"I would play 'good cop' and not do anything," said Oppenheimer's Gheit. "If they are patient, they will be rewarded because you will see a precipitous drop in capital spending, and that will tighten the market, in itself."

But demand has shown little indication of rebounding soon, and global crude stockpiles are growing - as evidenced by a U.S. government report showing a surprisingly large 7 million barrel build in stocks last week.

Those factors argue against restraint if some in OPEC want crude back up to at least $70.

Even so, Algerian oil minister and OPEC president Chakib Khelil has urged a wait-and-see approach, saying that the group risks losing credibility if it enacts new cuts in Cairo only to find members were not complying with the Vienna decision.

Political considerations are also likely to factor prominently.

Saudi Arabia is a close U.S. ally in the Middle East, and is eager to see concerted Washington backing for peace efforts in the region.

One way of winning new support from the incoming administration of U.S. President-elect Barack Obama would be by tacitly working to undercut two of Washington's most strident foes, Venezuela and Iran. It would not be an onerous job for the Sunni Muslim Saudis, who have no great affection for Shiite Iran.

"Saudi Arabia is playing ball with the U.S.," said Gheit. "It is going to punish Venezuela. It is going to punish Russia. It is also going to curtail Iran."

AP Business Writer Adam Schreck contributed to this report.

Copyright 2008 Associated Press. All rights reserved. This material may not be published broadcast, rewritten, or redistributed

WASHINGTON (CNN) -- South Korean President Lee Myung-bak said Sunday he would "welcome" and "support" a meeting between President-elect Barack Obama and North Korean leader Kim Jong Il if Obama were to take such a step after taking office.

In an interview with CNN's Alina Cho at the Group of 20 financial summit in Washington, Lee said that when he spoke with Obama after the U.S. presidential election, Obama promised to consult with South Korea before taking any major action on North Korea.

In response to a question at a presidential debate, Obama said he would meet without preconditions during the first year of his administration with leaders of several nations whose governments have been at odds with the United States, including North Korea.

Laying out his foreign policy on his campaign Web site prior to the election, Obama said he and his running mate would "use tough diplomacy -- backed by real incentives and real pressures -- to prevent Iran from acquiring nuclear weapons and to eliminate North Korea's nuclear weapon program."

"Barack Obama and Joe Biden will not take any options off the table, but they will emphasize first and foremost the power of American diplomacy and make clear the substantial benefits to Iran and North Korea of abandoning their dangerous nuclear programs while simultaneously conveying the enormous costs to them should they fail to do so," according to the Web site.

Lee told CNN he has high expectations for Obama, calling him "the right leader at the right time." He said any damage done in recent years to U.S. global leadership may be because the country relied too heavily on "hard power," and that he believes Obama will be effective in utilizing "soft power."

A former CEO of Hyundai, Lee criticized the idea of a bailout of the U.S. auto industry, saying it would set a bad precedent

Bush calls meeting with Obama 'friendly'

President Bush had a "relaxed" and "friendly" meeting with President-elect Barack Obama after he and first lady Laura Bush welcomed their successors to their future home Monday, a White House spokesman said.

"The president and the president-elect had a long meeting, described by the president as good, constructive, relaxed and friendly," White House press secretary Dana Perino said in a statement. "The president enjoyed his visit with the president-elect, and he again pledged a smooth transition to the next administration."

Perino said the two discussed both national and international issues but did not provide specifics of the conversation. Bush also gave Obama a tour of the White House's living quarters, including the Lincoln bedroom.

Bush and Obama held a private meeting in the Oval Office, while the first lady gave incoming first lady Michelle Obama a tour of the residence.

The president and president-elect walked together along the Colonnade by the Rose Garden before entering the Oval Office together. They briefly waved to reporters along the way.

Obama and Bush were not expected to speak on camera after their meeting.

An aide to Obama said they were "going to let the pictures speak for themselves."

The two met in the Oval Office for just over an hour. When President George H.W. Bush hosted President-elect Bill Clinton after the 1992 election, the two talked for nearly two hours.

Monday's meeting was a historic formality, but it was also a time for serious talks. It marked the first time that Obama has visited the Oval Office. Watch Bush welcome Obama to the White House »

The two were expected to discuss "a broad range of issues," focusing on the economy, according to a leader of Obama's transition team.

"It's clear that we need to stabilize the economy, to deal with the financial meltdown that's now spreading across the rest of the economy. The auto industry is really, really back on its heels," transition team leader John Podesta said.

Podesta told CNN's "Late Edition" that Obama will push Congress to enact "at least part" of an economic package before he takes office in January, but said the problems Americans face need short- and long-term approaches.

The president and president-elect also were expected to talk about national security and the war in Iraq.

Perino said earlier Monday that Bush and Obama were going to have a "private meeting" in which they would discuss "a range of issues." Go inside the Oval Office

"I don't think any of us can understand what it's like for two people ... who understand what it's like to be the commander in chief, to be the leader of our great country," she said. "And so they'll have a private conversation. I'm sure they'll talk about a range of issues."

Despite the negative tone of the campaign season -- in which Obama frequently campaigned against what he called Bush's "failed policies" -- Bush has pledged to do everything he can to make sure they have a smooth transition. iReport.com: What's your message for Obama?

"When I called President-elect Obama to congratulate him on his historic victory, I told him that he can count on my complete cooperation as he makes his transition to the White House. Ensuring that this transition is seamless is a top priority for the rest of my time in office," Bush said in his radio address this weekend.

Podesta said cooperation with Bush administration officials has been "excellent" since Tuesday's election. Watch more on the transition to power »

Obama said he was "gratified by the invitation" to meet with the president and his wife.

"I'm sure that, in addition to taking a tour of the White House, there's going to be a substantive conversation between myself and the president," he said at a news conference Friday.

"I'm going to go in there with a spirit of bipartisanship and a sense that both the president and various leaders in Congress all recognize the severity of the situation right now and want to get stuff done," he said.

Given their drastically different views on foreign policy, Mark Preston, CNN's deputy political editor, predicted an "uncomfortable meeting at best." Watch CNN's Mark Preston talk about the meeting »

"Let's not forget that Barack Obama ran against President Bush every day when he was taking on John McCain. While they will be cordial, I bet you it will be uncomfortable," Preston said.

As the president and president-elect met in the Oval Office, Perino gave Robert Gibbs a tour of the White House press office.

Gibbs was the communications director for Obama's presidential campaign. He has not officially been named the incoming press secretary, but he is widely considered the top contender for the position