Hamish McRae: Energy, trade and a world out of kilter: it's grit, not glitz, at this year's G8 summit

It is Russia's turn to host the G8 economic summit and this weekend its second city, St Petersburg, home of President Vladimir Putin, gets the honours. While politics have long since taken over from economics as the main theme of these summits, the membership of Russia was particularly political. When Boris Yeltsin was invited by Bill Clinton to join the then G7, it was basically a sop to assuage Russian fury at the westward expansion of Nato to include the USSR's former satellite countries in Eastern Europe. It was not because the size of Russia's economy justified membership.

But now the wheel has come full circle. The first economic summit, in 1975, was held in the aftermath of the first oil shock. It was called by the French President, Valéry Giscard d'Estaing, and the German Chancellor, Helmut Schmidt, and held at the château of Rambouillet, near Versailles. On the agenda was how to put the world economy back together again. Eventually that happened, though it had more to do with the fiscal and monetary discipline re-established through the 1980s than the political initiatives at Rambouillet.

Now once again the world faces an oil shock, with the price of the black stuff hitting an all-time high last week. Technically, the Russian economy is still too small to rank - China should be in, not Russia - but it is the fastest-growing member. In any case, the country's significance as an oil and gas producer makes it wise to have Russia inside the tent. Oil would already have been one of the core issues at the summit before the explosion of violence in the Middle East last week, but the timing gives energy security particular bite.

Since the summit is more about politics than economics, the issues discussed will include all the usual suspects: hot political potatoes such as international terrorism, Iran and North Korea, as well as long-term matters such as global education and health.

Three issues will come up, however, that have direct economic resonance. One is energy, the others are international trade and global payments imbalances.

A word about each in a moment. First look at where we are now. The graph shows the IMF spring estimates for growth, this year and next, in both the world economy and some big players within it, including all those at St Petersburg. What is striking is the activity outside the G8. The global economy as a whole is projected to keep growing at a little below 5 per cent a year, higher than any of the G8 bar Russia. Even the US is projected to grow at only a little over 3 per cent, the main continental European economies 2 per cent or less.

Contrast that with Africa at 5.5 per cent, China at 9 per cent and India at 7 per cent. That first figure is particularly encouraging, with sub-Saharan Africa fully sharing this overall performance. The G8, Russia apart, is by world standards a slow-growth club.

Now, from this perspective, look at the three issues noted above. We tend to regard energy as a problem of the developed world but it is much more nuanced than that. Canada (on a big scale) and the UK (just) are net oil exporters. China and India are net importers and on a growing scale. Africa varies vastly across the continent, with some countries importers, others exporters. So the initial impact of the squeeze on energy supplies is very different depending on where you look.

The lesson of recent months is that the world has learnt to live with expensive oil. There was an encouraging statement on Friday from Opec, assuring us it was committed to keeping the oil market stable. But were the energy squeeze to worsen, the present, reasonably sanguine, outlook for the world economy could deteriorate quickly.

A particular concern here is with Russia. A year ago it would have been seen as a stable supplier of energy. Its spat with Ukraine, when it cut off gas supplies, changed that perception. It won't just be the other G8 members making a judgement as to whether OPEC is a safer bet than Russia.

The second issue is the need to rescue the Doha world trade round. These talks are stalled and the question is whether it is better to have a flawed agreement or none at all.

The great gainers from trade liberalisation have been those high-growth countries and regions shown on the graph. It was intriguing to hear the summit host, Mr Putin, saying that bringing the Doha round to a successful conclusion was one of his priorities. He also stressed the need for protection of intellectual property - something that a Russian leader would never have done a generation ago.

There is a general point here and a specific one. On the first, trade talks have been the motor of economic growth ever since the Second World War. No trade round has ever failed. Were that carrot of ever-freer trade taken away, the world economy would head into unknown territory. The dangers of protectionism always lurk in the shadows.

The specific point is that this is a political issue which can be fixed. The G8 leaders have it in their authority to push the trade round to an imperfect but acceptable conclusion. At the least, the St Petersburg meetings should keep the window open for agreement. Fingers crossed.

The third issue, global imbalances, does not appear explicitly on the agenda but remains the greatest threat to the world economy - even greater, I think, than energy security. It is the prime concern of the IMF, which has assembled a committee to monitor the situation. So the action, in so far as there is any, will be in Washington at the IMF rather than in St Petersburg at the G8.

However, a discussion anywhere about these imbalances helps. Ahead of the summit, Mr Putin noted how Russia had been paying back its international debts. The current imbalances are between the US and the rest of the world, with the US absorbing about two-thirds of the world's savings to cover its current account deficit. That is not sustainable, though no one knows how and when the adjustment will be made.

Fortunately, the US now has a new Treasury Secretary, Hank Paulson, the former head of Goldman Sachs, who understands it all. As and when the next international financial crisis flares up, it will be good to have someone around who understands the concerns of financial markets.

At Gleneagles last year, with Tony Blair as the summit host, the idea was to create a glitzy show that made the newly re-elected government look good - hence the role for the pop stars and the emphasis on an issue that no one could quarrel with: help for Africa. (Whether Glen-eagles really achieved much is widely, and sometimes intemperately, debated.) This meeting has a quite different tone: it is grittier. It may turn out to be more effective.

And you think life's expensive in London...

Londoners, battered by rising fares, chi-chi restaurants and Ken's congestion charge, will be pleased to know they do not live in the most expensive city on the planet. That's Oslo, which has just pushed Tokyo into second place.

The Economist Intelligence Unit carries out bi-annual surveys of the cost of living in more than 130 cities around the world - which large companies use to determine how much to pay people for moving continents. The latest survey is just out, revealing several intriguing trends.

One is that although European cities are in general the most expensive, North American ones are catching up. Another trend is that Japanese cities, while still very expensive, are falling back a bit. Latin American cities are fast climbers in relative terms.

At the top of the league table, after Oslo and Tokyo, come Reykjavik, Paris, Osaka, Copenhagen and London. New York, unsurprisingly the most expensive North American city, is at 22, the same as Moscow and Dublin. Manchester, at 28, ranks beside Düssel- dorf, Montreal and Vancouver. Then right down at the other end of the scale, the cheapest place is Tehran, with (going upwards) Manila, Karachi and Bombay.

The span is big, with Oslo 30 per cent more expensive than New York, and Tehran only a third of the New York price levels. That you might expect. What is surely surprising is that some cities appear very good value, whereas others are pretty poor. Not many people would choose to live in Tehran just because it is so cheap but cities such as Buenos Aires offer a lot for the money, whereas Oslo would seem to most people to be a bit overpriced. Too much oil jacking up the exchange rate, maybe.

Likewise Frankfurt - a nice enough city - is more expensive than Berlin, surely a place that offers much more to its citizens.

Why such wide variations? In the short term. exchange rates affect all international comparisons. But looking down the list, with a few exceptions, the differences seem to me to come down to the job opportunities and pay rates. Thus Frankfurt pays financial service industry wages and Berlin does not.