- The Washington Times - Monday, October 27, 2003

Markets as far away as Brazil shuddered yesterday after Russian authorities arrested Yukos oil magnate Mikhail Khodorkovsky, Russia’s richest man and a political opponent of President Vladimir Putin.

Moscow’s stock indexes plunged by as much as 14 percent.

Global investors, surmising that the move was aimed at stifling political dissent, feared a return to the kind of political instability that wracked Russia and other emerging markets during the global financial crisis of the late 1990s.

Russia, Brazil and many Asian countries have made strides in putting the hard times behind them, but yesterday’s market turmoil showed that the gains can be fragile amid spreading political volatility.

“Western investors don’t want to do business in an environment where the government confiscates private property and intimidates business people,” said Ian Hague, a portfolio manager at Firebird LLP. “It’s awful for the country’s image.”

Russian stocks, bonds and the ruble all plummeted at the open of trading in Moscow, with the benchmark Russian Trading System Index ending down 10 percent and the stock of Yukos, Russia’s biggest oil company, dropping 17 percent.

Mr. Putin defended Mr. Khodorkovsky’s incarceration on charges of fraud and tax evasion, and said he would not interfere with the court process, despite widespread charges in Moscow that his government was behind the move. Mr. Khodorkovsky provides the financing for political parties that oppose Mr. Putin.

Yukos said the charges against the company’s chief executive are “absurd” and politically motivated, and appointed an executive to manage the company in his absence. The arrest threw into the air talks of a sale of part of Yukos to Exxon Mobil.

The Russian turmoil pulled stocks lower across Eastern Europe, and had ripple effects as far away as Brazil, where memories linger of the 1998 Russian default that precipitated a financial crisis in Brazil and the rest of the world economy.

Brazil’s currency and stocks declined in sympathy yesterday, after rallying in response to a critical upgrade of Russian debt earlier this month by Moody’s Investors Service.

“If it wasn’t for Russia, the real [currency] would have gained,” said Daniel Vairo, a trader with Opportunity Asset Management Ltd. “Just as Brazil rose with Russia’s debt upgrade, it’s falling on the arrest.”

The contagion from the Russian crisis was nowhere near as widespread, however, as it was after the 1998 default, which came after a year of financial turmoil that started in Asia. Trading was tranquil in most Asian and Latin emerging markets yesterday, and the major markets in New York, Tokyo, Frankfurt, Germany, and other Western financial centers did not even flicker in response to the news.

Russian investors said the arrest threw into question Moody’s decision earlier this month to raise Russia’s credit rating from junk status to investment grade for the first time in five years — a move that is generally seen as a green light for big institutions thinking of investing in Russia.

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