Evening Standard (London): Why Yukos oil scandal is not the signal for Russian roulette

WITH Russia's richest man arrested at gunpoint and locked in a cramped cell alongside three fellow inmates, it is not the most auspicious time for British business chiefs to strengthen links with Moscow.

Yet, CBI president Sir John Egan has been doing just that - leading a high-level delegation at the seventh UK-Russia business roundtable this week.

Mikhail Khodorkovsky's arrest in Siberia last Saturday and the State prosecutor's seizure of a 61% controlling stake in Yukos yesterday stunned the Russian business community and Western investors. Yet the message from seasoned Moscow analysts is to hold firm. Although, not everyone is so sanguine.

"Khodorkovsky's arrest serves as an unwelcome reminder of Russia's high-risk and the country's questionable legal system," warned broker Aton Capital.

And the damage has already been done, with US majors ExxonMobil and ChevronTexaco halting - for now - talks on buying a major stake in YukosSibneft, the new Russian giant that unites the oil empires of Khodorkovsky and Chelsea football club owner Roman Abramovich.

The arrest is widely blamed on oligarch Khodorkovsky funding two political parties opposed to " authoritarian" President Vladimir Putin. Russian prosecutors, and Putin, say it is a simple matter of serious criminal allegations, that Khodorkovsky cheated the taxman out of around $1 billion (589 million).

The US government has intimated "justice" is being used to settle political scores.

This in turn creates " uncertainty about just how predictable this investment climate is after this event", warned a US diplomat.

The US says that, despite deep controversy over privatisation, Khodorkovsky has established one of the most transparent Russian companies using Western accounting practices - he even appointed ex- SDP leader Lord Owen as a key adviser.

"One is drawn to the conclusion that this transparency is seen as an actual threat," said a US diplomat, and that the Kremlin was seeking to restore its "tools of control".

If true, this is alarming, not least for firms such as BP that have bought into Russia on a massive scale on the basis Putin is serious about a stable economy adoptingWestern ways.

Those criticising the Yukos arrests - an ally of Khodorkovsky has been in jail since 2 July, also on fraud charges - blame the coterie of KGB apparatchiks who have swept into many key Kremlin positions.

One theory is they want a slice of the wealth of companies that were privatised to the narrow circle of oligarchs close to The Family - the nickname for the circle of former Pre s ident Boris Yeltsin.

The initial Russian market reaction to Kho d o rkov s k y ' s arrest saw Yukos lose up to a fifth of its value. It had recovered some of that before being hit again by yesterday's action.

"This was painted as a crisis as bad as the rouble collapse of 1998, yet it is far from it," says a seasoned Western banker in Moscow.

"Khodorkovsky has got caught up in political machinations but it doesn't mean the rest of the scene is suddenly bad."

It was too early to forget Russia "has the one of best economies of any emerging market," said William Browder, of Hermitage Capital, Russia's largest foreign investor fund.

This was the message received by Egan's delegation on the Moscow visit and echoed by the decisions of Moody's and Standard Poor's not to lower the country's credit ratings. Yet observers will watch closely for any widening of legal assaults on major Russian companies, especially those with big Western investments.