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. Last Updated: 07/27/2016

Stocks See Blackest Day Since 1998

The RTS index plummeted more than 5 percent Wednesday -- the biggest one-day drop since the dark ages of post-crisis December 1998 -- as oligarch-under-siege Mikhail Khodorkovsky returned from the United States with another loud warning that the attack on his company could ruin the investment climate.

In what investors said was an unexpected show of defiance to the Kremlin, Khodorkovsky arrived at Vnukovo Airport to tell journalists that he thought the case could unleash a new wave of capital flight.

"There will be a significant outflow of capital from the country. Many investment decisions will be put off. I felt this in my meetings with powerful business people in the United States," he was quoted by Reuters as saying.

Khodorkovsky, who had been out of the country since Friday, met U.S. business leaders such as Bill Gates and Warren Buffet at an exclusive conference in Sun Valley, Idaho, and other members of the U.S. elite in Washington.

"It will be clear by the end of the year what the country has lost because of this," he said, Interfax reported.

He repeated his claims that the whole affair, which began July 2 with the arrest of his right-hand man Platon Lebedev on embezzlement charges and has since escalated to include allegations of tax evasion, was a political attack and the result of petty "intrigues."

His oil major Yukos has dropped more than 20 percent and lost almost $7 billion in value since the crisis began. Shares were down 7 percent Wednesday.

Khodorkovsky has warned before that the case against Yukos, which has become a top pick for investors because of its attempts to develop a pro-Western image, could have destructive consequences for the economy.

On Wednesday, however, those jitters finally infected the rest of the market. Sibneft, the oil major with which Yukos is due to merge, was down almost 10 percent, while Unified Energy Systems was down nearly 8 percent and Gazprom fell more than 5 percent.

Analysts said Wednesday's market meltdown came as a result of the lack of a clear sign that the conflict is going to end, an increasing realization among investors that the results of Russia's corrupt privatizations could still be up for grabs, and Khodorkovsky's apparent willingness to take on the Kremlin.

Yukos appeared to be drumming up support for an all-out fight by running a letter from leading civil rights activists on its web site accusing the Kremlin of totalitarian moves.

That letter, signed by the heads of the Helsinki International Human Rights Federation, Glasnost Defense Foundation and other organizations, journalist Yevgenia Albats and the head of the Higher School of Economics, Yevgeny Yasin, harked back to the days of Putin's purges of opposition oligarchs Boris Berezovsky and Vladimir Gusinsky.

"Recent events have incontrovertibly demonstrated that the stability claimed by the president and the government has been shaken," said the letter, which was called the "statement on the situation around Yukos by members of the Russian public."

"The core of real democracy, which is based on independent business and freedom of information, has once again been severely damaged," it said. "A crisis in society can clearly be seen."

"Khodorkovsky's talk about capital flight was a pretty big signal for the market that he may be thinking about taking money out of the country," said Roland Nash, head of research at Renaissance Capital. "Domestic interest has been driving Russia up for the last four to five months. If that Russian capital leaves, the market is going to come down very heavily.

"The fact that Khodorkovsky looks like he's going to put up a fight is adding to the recognition that Russia is still a risky place. Investors refused to think the Yukos affair would last. But the news has continued to seep into the market.

"Two weeks ago there were no sellers. Now there are no buyers," he said.

One Western fund manager, who asked not to be identified, said the drop has been partially driven by Yukos-linked companies selling out. "Various Yukos-related entities stopped buying," he said. "It's like Khodorkovsky's having a temper tantrum and saying if you don't let me do what I want I'm going to bring everything down with me."

"He can cause quite a bit of damage because Yukos is widely held by so many different institutions. It is a tourist stock," the fund manager said. "This raises the perception of risk overall."

It is in Khodorkovsky's interests to create as much market fear as he can, he said. But the market was expecting him to keep quiet and for the whole thing to die down.

ING Bank issued a report to its emerging market clients Tuesday saying the Yukos case potentially put at stake "one of the central pre-requisites of a functioning market economy -- clearly, defined operable property rights."

Arkady Volsky, president of the Russian Union of Industrialists and Entrepreneurs, or RSPP, came out of a meeting with President Vladimir Putin on Wednesday with no immediate answers to those concerns.

The RSPP had sent a letter to Putin warning that "the actions of some politicians, supported by members of the security services, are aimed at undermining the country's stability, at re-examining the results of privatization and at portraying businessmen as the enemy."

After the meeting, which was his first chance to discuss the letter privately with Putin since he had handed it to him Friday, Volsky said Putin had repeated what he had said at Friday's Kremlin meeting about being opposed to throwing people in jail for economic crimes.

"I think a step has been made toward easing and in the future toward totally defusing the tense situation that has recently built up between law enforcers and one of the biggest companies in the country," Volsky said, Interfax reported.

But at the same time, he said, "the sides need time, patience and readiness to find a solution to this complicated situation.

"This is not only a matter of concrete people and organizations," he said. "It's about the general rules of the game, and the entire solution to this depends on [these rules] being confirmed."

Analysts have said the attack on Yukos comes as a result of infighting between the old oligarchic elite who made their fortunes under the Yeltsin regime and former members of the KGB who came into the Kremlin with Putin.

The twists and turns of the case showed no signs of ending, however, with the Tax Ministry issuing conflicting reports on whether it was conducting a new investigation into Yukos' affairs. The day began with Deputy Tax Minister Rinat Dosmukhamedov saying at a press conference that prosecutors had requested a new tax investigation into Yukos. A few hours later, however, the Tax Ministry said the deputy minister's statements were " a slip of the tongue."

A spokeswoman for the Tax Ministry said prosecutors had requested material from previous tax inspections. She could not say, however, whether those investigations had uncovered any violations.

The Prosecutor General's Office denied a report that said a new criminal case had been opened on a complaint by state-owned oil major Rosneft, which accused Yukos of stealing a 19 percent stake in Yeniseineftgaz. A spokesman said prosecutors were still examining the case.

Meanwhile, prosecutors also denied a report by lawyers for Lebedev that investigations into his case had been halted because of his growing ill health. Lebedev has been suffering from high blood pressure, said Yury Kotler, spokesman for Group Menatep, the holding company that owns 60 percent of Yukos on behalf of core shareholders.