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Russia: Financial Markets Suffer In The Wake Of Yukos Arrest

Russian financial markets are suffering in the wake of the arrest over the weekend of Yukos oil company boss Mikhail Khodorkovskii. The prices of publicly traded stocks and bonds fell around 13 percent yesterday amid fears the arrest will discourage foreign investment. It was the worst one-day drop since the August 1998 ruble crisis. Traders say it's still not clear how the arrest will affect investor attitudes.

Moscow, 28 October 2003 (RFE/RL) -- "Stop the hysteria on this issue," Russian President Vladimir Putin told businessmen yesterday in the wake of the 25 October arrest of Yukos oil company boss Mikhail Khodorkovksii.

He could just as well have been speaking to investors in Russia's financial markets, where prices of publicly traded stocks and bonds yesterday plunged in the wake of the arrest. It was the worst single day for the country's financial markets since the ruble crisis of August 1998.

It's not yet clear what affect, if any, the arrest will have on financial markets. Investors generally shy away from any uncertain situation -- such as a high-profile arrest that many feel has political, rather than legal, motivations.

Analysts, however, appear to be cautiously optimistic the markets can weather the storm. Indeed, financial markets recovered slightly today.

Aton investment fund analyst Alexei Vorobiov tells RFE/RL that any comparison to 1998 -- when a highly overvalued ruble collapsed, sending investors fleeing -- is erroneous. He says the 1998 crisis was the result of very deep structural problems in the economy. The Yukos affair, he says, is nothing like that.

"For some time, the downward tendency [in the markets] will continue. But I have to point out that most likely it is a psychological reaction to what I would describe as a localized political, temporary crisis. Investors have a short memory, like they did when similar things happened to other oligarchs. So we can't speak about a serious crisis," Vorobiov said.

The total amount of losses on the Moscow stock exchange yesterday came to about $14.5 billion in market capitalization. Much of this was due to the 17 percent fall in the value of Yukos's shares. Yukos and another smaller oil company, Sibneft, account for about a third of the RTS, the main stock index.

Heinz Roepheli, an investment manager at ING Switzerland for big clients in Zurich, says he sold his Yukos shares three months ago, when the Russian stock market surpassed its 1998 pre-crisis high. He says yesterday's stock market crash may simply be a "correction" in prices that were already highly inflated.

"It's interesting, but I believe we have seen it, the [market's] performance. Therefore, I can't believe that the market will perform much better in the next couple of months. It comes down to the same balloon we had on the [U.S.] Nasdaq [stock exchange] two years ago. I believe that it's very dangerous, investing now -- I would [sell and] take the profit now," Roepheli said.

Roepheli says the drop could have a positive influence by lowering prices to the point that Yukos shares are again attractive to buy.

Aton's Vorobiov believes Yukos shares could very well bounce back. He says large companies can usually perform without their bosses. He says he thinks investors are more sensitive to positive information about the Russian economy's performance, its overall trends, than about one-time negative political news.

Just two weeks ago, the U.S.-based debt-rating agency Moody's gave Russian debt what it called "investment grade" status because of Russia's improving economic performance and political stability. Apparently Khodorkovskii's arrest will not affect this upgrade, as Moody's told the English-language "Moscow Times" today.

Roepheli says, however, the arrest does send a chill down investors' spines. He says the threat of arbitrary state intervention in the economy is now the most worrisome signal.

"First I thought that [Khodorkovskii] had so much money that he will dictate everything -- but it's not [like] that. It's the other way around. The government is now telling him what to do," Roepheli said.

For many, the Yukos crisis is simply a reminder of the nature of the cracks in the economic foundation of Russia -- insecurity about the inviolability of private property.

Meaning to reassure worried investors, Putin said yesterday the fraud charges related to Yukos's privatization deals in the early 1990s do not mean that all of the privatization deals will be reconsidered.

Still, Vorobiov says a look at Putin's record is cause enough for concern.

"Political risks have increased quite considerably, also concerning investment in the Russian economy. All depends on whether or not the process we now see, the repression of big business, will spread to other companies. The authorities promise and swear on the Bible that it will not happen, but in 1999 and 2000 we saw some clear precedents of ownership changing," Vorobiov said.

Vorobiov is referring to the transfer of privately held NTV and ORT television stations' assets to state-controlled entities.

If Khodorkovskii is convicted of embezzlement, he could be stripped of all his assets, including his own shares in Yukos.