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In sharp turnaround, markets buoyed by arrest of top Yukos ally
July 24, 2003

Russian markets reacted with calm, even verging on enthusiasm, Thursday to the courts' refusal of bail to the number two shareholder in oil giant Yukos -- which has been waging an anti-Kremlin campaign.

However chief Kremlin foe Boris Berezovsky published a scathing attack on President Vladimir Putin in his own mass-circulated daily Kommersant, accusing the Kremlin of staging "an anti-constitutional government coup."

And Prime Minister Mikhail Kasyanov -- who is seen to be close to the Berezovsky camp -- chipped in Thursday by warning that the three-week-old Yukos scandal "does not help our country's image and is hurting the mood of investors."

A Moscow court ruled Wednesday that Yukos number two shareholder Platon Lebedev must remain behind bars while he awaits a hearing on charges he embezzled more than 280 million dollars (247 million euros) in a shadowy 1994 privatization deal.

Lebedev is the right-hand man of Mikhail Khodorkovsky -- Russia's richest baron and chief Yukos shareholder -- who has been funding a group of anti-Kremlin parties ahead of the December 7 elections to the State Duma lower house of parliament.

Conventional wisdom had said the markets were deeply concerned by the attack on Yukos since they read it as a bid by a group of Kremlin insiders and their allies within the security structures to quash the opposition ahead of the Duma vote.

They also feared the affair could signal a wider investigation into past privatization deals, potentially damaging the distribution of property.

The markets sagged nearly 20 percent as the crisis unfolded and Lebedev's potential release on bail was expected to signal that a Yukos-Kremlin truce had been struck and that politics in Russia were calming.

But a look at the early markets Thursday and the analysts' post-event analysis rubbished this theory.

The main RTS index was up more than one percent at Thursday's opening bell.

"The conclusion ... must be that the market will now take the ongoing Yukos-Kremlin conflict in its stride -- unless there is further escalation. Our base case forecast is that events will not escalate from here," the United Financial House said in a research note.

However risk -- as is usually the case in Russia on the eve of a tense election season involving under-the-carpet power struggles -- is a factor, the investment house conceded.

"The risk ... of one side or the other has obviously not disappeared," said the firm.

Other bankers said that it was only fair to keep Lebedev in the Lefortovo prison.

"Lebedev's release yesterday would not have meant the end of the Yukos affair and his continued detention is not a great surprise given the amount of money involved in the alleged fraud," the Aton investment house said.

Other analysts said Yukos -- until now championed by human rights groups and foreign investors -- was actual detrimental to Russia's drive toward economic reform.

"This is a fight we could have lived without, yet -- not only is Russian reform not imperiled -- it would have been gravely jeopardized had the government allowed the oligarchs to grab control of the Duma," said Sovlink chief strategist Eric Kraus.

The Duma is now controlled by pro-Kremlin factions.

"Russia's best hope for reform is a pro-Kremlin super-majority in the next Duma, allowing the president to push through reformist legislation in the face of entrenched opposition by the corrupt bureaucracy and greedy oligarchs," said Kraus.

The experienced Russia hand suggested the whole scandal was started when Yukos, through its access to the government, tried to push out two of the cabinet's most powerful liberal reformers -- German Gref and Alexander Kudrin.

Trade and Economic Development Minister Gref's position has been seen as especially shaky in the government since he regularly feuds with his boss Kasyanov in public.

Kudrin is deputy prime minister overseeing the economy.

Meanwhile Berezovsky accused the Kremlin of "dragging Russia into a civil war" in a scathing attack writting from his exile home in London.

He called Putin "a president-bureaucrat -- the most dangerous (kind of person) for the country ... because he cannot make his own decisions."

Berezovsky has also attempted to finance anti-government parliamentary groups.

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