An interview with Christopher Weafer, chief strategist at Alfa Bank

Christopher Weafer recently wrote that the future of the investment climate depends on the figure in power; and Putin is an ideal president in this regard, since he personifies the stability that business needs. In the lead-up to the new political season, we asked him to elaborate on his position.

Alfa Bank, one of Russia’s largest private banks, recently released a sensational analytical report. Its author – Christopher Weafer, chief strategist at Alfa Bank – made a point of expressing support for Vladimir Putin, essentially agreeing to the idea that Putin should serve a third term. In the report, Weafer said that the future of the investment climate depends on the figure in power; and Putin is an ideal president in this regard, since he personifies the stability that business needs. In the lead-up to the new political season, we asked Christopher Weafer to elaborate on his position.

Question: Is it possible to predict the reactions of Russian citizens, the elites, and the international community in the event that Putin stays on as president?

Christopher Weafer: That depends on the circumstances that permit or force Putin to stay on. If he amends the Constitution against the backdrop of strong public support, then all political forces at home and abroad will agree to such a change. Public support is the major precondition for transformation, ensuring that political stability is preserved, that being the most important factor in maintaining economic growth. Political leaders abroad – in the United States, for example – will be in favor of it, since they know Putin and have already established a working relationship with him. Investors will be glad to maintain stability and avoid the upheavals that might be caused by power-struggles between various Kremlin factions.

Presumably, the calls for amending the Constitution will grow louder and louder, thus enabling Putin to remain in power. Putin will probably continue saying that he doesn’t want to do so, but at some point – 2007, say – the demands “from below” will become so insistent that he will have to “reluctantly” consent to amending the Constitution, “for the good of the nation and in keeping with the people’s wishes.”

Question: In your view, how likely is a scenario where a substantial part of the business community supports the opposition in the 2008 election?

Christopher Weafer: Such a danger did indeed exist in late 2004 (when discontent with the actions of some state officials and a number of agencies, particularly the Federal Tax Service, reached its peak) and early 2005. But Putin sensed this danger and endeavored to conclude something like a “peace treaty” with the business community. To date, he has kept his promises. At this point, we believe there is a substantially lower probability of big business supporting any independent opposition figure or some other candidate, such as Kasianov.

As long as the government keeps its promise of making no further attacks on business and keeping the actions of officials under control, it will not be in the interests of big business to support the opposition and create an instability situation in politics and the economy.

Question: Do you think popular unrest is possible in Russia today?

Christopher Weafer: A great deal depends on the volume of state revenue inflow. If this inflow remains at a level that enbles the government to increase social spending, calls for political change won’t get any substantial support.

Given the current favorable pricing situation in the global oil and gas markets, and given the state’s current practice of “handing out” money – even if no job creation measures are taken – we may assume that there shouldn’t be any noticeable social unrest or political problems for the next two or three years, at least.

In the longer-term prospect, Russia could run into such problems. The point is that the state is only sharing with the people what might be described as “natural resources rent”; so when “natural resources rent” runs out, the people will have a negative reaction leading to political instability. Such a model is a particularly realistic prospect in the case of Russia, which has a big income gap between the rich and the poor – nearly 15-fold.

But even if the economic situation does get drastically worse, after 2008 the people who are now in the Kremlin will have concentrated so much power in their hands that it will be practically impossible to resist them successfully.

Question: But in that case, what should be done about the economy?

Christopher Weafer: In order to solve that problem, the state should direct more resources toward the goals of ensuring steady economic growth, making it possible to increase national wealth, and increasing incomes in sectors not connected with oil production. So the government needs to create the growth incentives it has promised in all sectors of the economy, in order to ensure long-term economic growth.

Question: What kind of signal should investors be waiting for in order to understand that the situation in Russia has become favorable for investment?

Christopher Weafer: Judging by current stock exchange prices, the investors who were previously selling shares due to the YUKOS affair are starting to return to Russia. Direct investment is already coming back to sectors that provide consumer demand; however, this is insufficient from the perspective of the whole economy. The main question is how long it will take before major strategic investors feel comfortable, and when the state will explain the terms on which it would like to accept their investments. In this sense, it’s revealing to note the example of Siemens, which failed to acquire Silovye Mashiny.

On the other hand, there are more and more signs that foreign investors, like Russian business leaders, are ceasing to fear Russia and resuming investment in the Russian economy. This process will probably be slow until the results of the 2008 election are known, since investors need to be convinced that there won’t be any political instability or major changes.

Question: Is the glass half-empty or half-full? In other words, can the current economic situation be described as favorable?

Christopher Weafer: It always seems to be half-empty in Russia. Ordinary citizens and investors look back at the country’s history anxiously; they are also concerned about the economy’s dependence on oil. Even though the current situation is very favorable for investors in terms of economic growth, state finances, and political stability, there is still the sense that it might change rapidly. We need to wait for the outcome of the 2008 election.