YESTERDAY WAS the blackest day for the Russian economy since 17 August 1998, when the rouble went into free fall after Russia defaulted on its foreign debts. Overall, shares registered their sharpest decline for more than four years: the Russian Trading System Index (RTS) plunged at the start of trading, to close 10 per cent lower. Trading in the oil giant Yukos was suspended for an hour after a precipitate fall at the start of the day. It ended 17 per cent lower, and Sibneft, the smaller oil company Yukos has agreed to buy, lost 19 per cent of its value. The rouble fell against the dollar and the euro - its first decline for more than a year. Bonds also fell.
All this market alarm was generated by one event: the arrest at the weekend of Mikhail Khodorkovsky, the billionaire chief executive of Yukos, Russia's biggest oil company. Mr Khodorkovsky is being held in prison facing charges of fraud and tax evasion.
At least some of the alarm was generated by the deliberately ostentatious manner of Mr Khodorkovsky's arrest. His private plane was surrounded at Novosibirsk airport and boarded by heavies from the FSB, the successor to the Soviet-era KGB secret police. Mr Khodorkovsky and his entourage were ordered to throw down any weapons, handcuffed, hooded, then sent to Moscow. The whole episode smacked of a previous era - or another country. It is not necessary to believe Mr Khodorkovsky's advocates when they insisted he was not avoiding questioning or fleeing the law, and to regard this as no way for a business-friendly country to treat its richest man, whatever his crimes.
Mr Khodorkovsky's arrest sends one unambiguous message: exceptional wealth does not buy anyone immunity from prosecution in today's Russia. And this may have been the message it was designed to send. The Russian authorities had had Yukos in their sights for more than six months. Four of its senior executives had already been arrested or questioned. The company's offices had been raided three times and documents taken. But until Saturday, most Russia watchers had been convinced that the authorities would steer clear of Mr Khodorkovsky, arguing that his arrest would be too much of a risk to investment.
The extent of that risk became apparent from the market reaction - Russian and international. It also demonstrated how much Russian business success is still associated in the minds of investors with one individual. Remove - or impugn - that individual, and confidence haemorrhages.
Optimists would point out that, while confidence in Russia took a battering yesterday, foreign investors remained remarkably sanguine. As did Yukos, which named an interim chief executive and said negotiations with ChevronTexaco and ExxonMobil would proceed, although ExxonMobil was more cautious. Another large Russian oil company, Lukoil, yesterday finalised a $750m (pounds 440m) syndicated loan deal with Western banks, while BP, which is buying a 50 per cent stake in the second-largest Russian oil company, TNK, said that difficulties at Yukos had no bearing on its own deal.
Analysts also noted that Russia's capital markets still play a minor role and that the misfortune of one company need not affect the overall picture. That the fall in the RTS and the rouble were not greater is testimony to the strengthened confidence in Russia's economic prospects over the past six months. Earlier this month, Moody's promoted Russia to investment rating for the first time, which propelled Russian shares to record levels.
Nonetheless, as the market reaction showed yesterday, Russia's treatment of Mr Khodorkovsky has done the country no favours with investors, or with budding Russian entrepreneurs. …