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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.

Oil prices rose Wednesday as a large interest rate cut in China and news of a possible Russian output cut appeared to counter another round of dour economic news and larger-than-expected crude stockpiles in the U.S.

Trading was very volatile, continuing a week of huge price swings from day to day.

There were no such swings for retail gasoline, however. As many Americans hit the road for Thanksgiving, pump prices fell again overnight to a national average of $1.868 for regular unleaded, according to auto club AAA. It marked the lowest price since January 2005.

The average national price has fallen 80 cents in just the past month and is down 40 percent from a year ago -- a rare bright spot for consumers in an otherwise dire economy.

"Of course, prices could go even lower than this, but this would tend to imply a far deeper global economic slowdown than we're currently experiencing and probably signal the arrival of a period of extreme economic adjustment as homes, factories and transportation systems reduce energy consumption," said AAA fuel price analyst Geoff Sundstrom.

In Nymex trading, light, sweet crude for January delivery jumped more than 5 percent, or $2.75 to $53.52 a barrel. The contract overnight fell $3.73 to settle at $50.77 after the U.S. said its gross domestic product shrank 0.5 percent in the third quarter, worse than previously estimated.

Buoyed by a surging Wall Street that reacted to news of a government bailout for Citigroup, oil prices climbed 9 percent Monday, then gave back much of the gain Tuesday amid more lousy economic news.

Crude's rebound Wednesday was not unexpected, some analysts said, noting the holiday week and relatively low trading volumes on the floor of the New York Mercantile Exchange.

"This has always been a very difficult week in which to generate a trend, and traders tend to be getting out of positions more than getting into them," the firm Cameron Hanover said in its Daily Energy Hedger report Wednesday.

Crude initially gave back early gains Wednesday after a new government inventory report showed far more crude and gasoline in storage than was expected.

For the week ended Nov. 21 crude inventories jumped by 7.3 million barrels, the Energy Department's Energy Information Administration said in its weekly report. Analysts had expected a boost of only 400,000 barrels, according to a survey by Platts, the energy information arm of McGraw-Hill Cos.

Gasoline inventories rose by 1.9 million barrels. Analysts expected stockpiles to rise by only 300,000 barrels. Demand for gasoline over the four weeks ended Nov. 21 was 2.8 percent lower than a year earlier, averaging about 9 million barrels a day.

But in a report released a day early because of the Thanksgiving holiday, the EIA said natural gas storage levels fell more than expected last week and are 3.1 percent below the year-ago average.

In its weekly report, the government said natural gas inventories held in underground storage in the lower 48 states dropped by 66 billion cubic feet to about 3.42 trillion cubic feet for the week ending Nov. 21. Analysts had expected a drop of between 43 billion and 48 billion cubic feet, according to a survey by Platts.

In equities trading, Wall Street extended its gains into a fourth session Wednesday as investors digested mixed economic readings on jobless claims, orders for big-ticket items and personal spending.

Among the reports, the Labor Department said initial requests for unemployment benefits fell to a seasonally adjusted 529,000 from the previous week's upwardly revised figure of 543,000. That is lower than analysts' expectations of 537,000. Still, the initial claims remain at recessionary levels.

Meanwhile, the Commerce Department said orders to U.S. factories for big-ticket manufactured goods plunged in October by the largest amount in two years as the economy weakened. The 6.2 percent drop was more than double the 3 percent decline economists expected.

The Commerce Department also said Americans cut back on their spending in October by the largest amount since the 2001 terrorist attacks. Consumer spending plunged by 1 percent last month, even worse than the 0.9 percent decline that had been expected.

Overseas, China's biggest interest rate cut in 11 years -- and the fourth in three months -- was expected to lead to increased demand for oil.

"This could help speed up the Chinese economy's recovery from the current slowdown and therefore encouraging for oil demand growth in the future," said a report from Sucden Research in London.

Also affecting prices was news that Russia, one the world's largest crude producers, may join OPEC in output cuts, Energy Minister Sergei Shmatko said in New Delhi on Tuesday, Press Trust of India news agency reported.

JBC Energy in Vienna noted that it's been nearly seven years since non-OPEC oil exporters Russia, Norway and Mexico last made coordinated moves to cut output.

In London, January Brent crude rose $1.72 cents to $52.07 on the ICE Futures exchange.

In other Nymex trading, gasoline futures rose 5.26 cents to $1.1525 a gallon. Heating oil gained 4.78 cents to $1.7466 a gallon while natural gas for January delivery jumped 37.6 cents to $6.762 per 1,000 cubic feet.