Shares of Yukos, the nation’s largest oil producer, plunged.
“It’s awful for the country’s image,” said Ian Hague, who manages $415 million, including $350 million of Russian assets at Firebird LLP in New York.
“Western investors don’t want to do business in an environment where the government confiscates private property and intimidates businesspeople.” The Russian Trading System Index, or RTS, dropped 13% as of 4.55pm in Moscow, its largest fall since May 1999.
Yukos plummeted 17% and OAO Sibneft, a company that Yukos has agreed to buy, slid 19%.
The ruble fell against the dollar and the euro, and bonds dropped.
Yukos has surged as Russian stocks climbed to all-time highs this year, bolstered by accelerating growth and rising oil prices.
Moody’s Investors Service raised the country’s credit rating to investment grade this month.
Khodorkovsky was arrested on charges of fraud and tax evasion.
Yukos called the charges “absurd.” Khodorkovsky, 40, finances parties such as the liberal Yabloko and the Union of Right Forces and has blamed investigations into Yukos on “Kremlin in-fighting.”
President Vladimir Putin yesterday said there would be “no bargaining” about actions by law enforcement, according to a statement on the government’s website.
“If a court made a decision, I assume the court had grounds,” he said.
“Everyone is equal before the court and the law, irrespective of how many billions of dollars are in his accounts.”
Shares of OAO GMK Norilsk Nickel, the world’s largest producer of nickel and palladium, shed 11%, and OAO Aeroflot, Russia’s largest airline, slumped 12%.
Yukos has been in talks with Exxon Mobil Corp to sell a stake, according to Mr Putin.
Merger talks with Exxon and ChevronTexaco Corp were halted after the arrest, the Financial Times reported yesterday, citing unidentified people close to the situation. David Eglinton, a spokesman at Exxon, wouldn’t comment on the report.
Yukos spokesman Alexander Shadrin said the company’s operations would not be affected by the arrest. Yukos will become the world’s sixth-largest publicly held oil company after buying Sibneft.
The ruble fell to 30.06 against the dollar as of 4.45pm on the Moscow Unified Trading System, from 29.92 on Friday. The ruble for next-day delivery slid to 35.30 per euro, from 35.25. The benchmark dollar bond due 2030 fell 1.75% as of 1pm in London, pushing the yield to 7.37%.
Moody’s, on October 8, raised the country’s credit rating to investment grade. That opened Russian stocks to a broader group of investors five years after the country defaulted on $40bn in debt. It also pushed Yukos shares to a record high.
“Some investors may now think that Russia is not as safe a place to invest and that the Moody’s upgrade was premature,” said Aivaras Abromavicius, who manages $230 million at East Capital Asset Management in Stockholm, including Yukos.
All the charges brought by the prosecutor against Khodorkovsky are “absurd,” the company said on its website. Khodorkovsky’s lawyer called the arrest politically motivated.
The arrest comes six weeks before parliamentary elections.
Yabloko and the Union of Right Forces, which Khodorkovsky backs, are groups that have opposed Putin’s policies.