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Khodorkovsky's Conviction 'Detrimental' for Investors, VTB Says

Mikhail KhodorkovskyDec. 31 (Bloomberg) -- The new sentence handed to Mikhail Khodorkovsky, the former head of Yukos Oil Co., may have "unintended repercussions" for the investment climate in Russia, state-controlled VTB Capital said.

Khodorkovsky, once Russia's richest man, will probably remain in prison for six years beyond an initial eight-year sentence, after Moscow Judge Viktor Danilkin found him guilty of money laundering and embezzling oil yesterday. Danilkin said the former billionaire will serve a total prison term of 14 years.

"This court decision is much more detrimental to the investment climate than the original tax fraud case," Alexey Zabotkin and Aleksandra Evtifyeva, economists at VTB Capital in Moscow, said in the note to investors today. "Unless overturned by the higher court, this ruling could have unintended repercussions that are more damaging than those."

Investors pulled $9.5 billion out of Russia in 2004 partly of concerns that then-President Vladimir Putin failed to protect property adequately. President Dmitry Medvedev, who has made it his administration's goal to combat corruption and attract foreign investors to reduce Russia's reliance on raw materials, said this week that a top priority for 2011 is to improve the investment climate in Russia.

The "most disturbing detail" was the court's rationale for the verdict, the VTB analysts said. Charges based on Yukos's use of internal transfer pricing create a precedent that leaves other holding companies open "to attack."

Kremlin Elections

U.S. and European government officials criticized the conviction of Khodorkovsky and his former business partner Platon Lebedev, saying it weakened the rule of law in Russia and would harm Russia's image among investors.

Khodorkovsky, 47, has called the charges retribution for political opposition to Putin. Previously due for release in 2011, Khodorkovsky will now remain in prison until after the 2012 presidential election that may return Putin to the Kremlin. Putin has denied any involvement in the case.

"There is no connection between the verdict and the investment climate in Russia," Putin's spokesman, Dmitry Peskov, said yesterday, declining to comment on whether the trial and verdict were fair. "Thus we can hardly talk about any potential influence on the investment climate."

Seasoned investors in Russia expected a conviction and have already priced it into the market, Chris Weafer, chief strategist at UralSib Financial Corp., said in a note earlier this week. "By the time Moscow's markets start on January 11, the case will already be last year's news," he said.

Three months after Khodorkovsky's initial conviction in May 2005, the Micex stock index in Moscow passed an earlier record high. The 30-stock index closed for the New Year holidays, rising 0.6 percent yesterday to 1,687.99, bringing the year's gains to 23 percent.

Khodorkovsky's and Lebedev's lawyers today filed a preliminary appeal of his conviction on oil theft and money laundering. The full appeal will be filed after the defense team receives a copy of the verdict, expected in January, Karina Moskalenko, one of Khodorkovsky's lawyers, said today by phone.

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