RUSSIA - The arrest of the head of Yukos, Russia’s largest oil company, will not slow the country’s move to a market economy, say Moscow investment analysts.

Roland Nash, chief strategist at Renaissance Capital, the Moscow-based investment bank and research house, said the arrest of Mikhail Khodorkovsky over the weekend was “the clearest possible sign of the risks in investing into a country where the institutional framework remains weak”.

However, he said it would not halt Russia's economic recovery. “While there is liable to be some short-term panic, Khodorkovsky’s arrest has not changed either the direction of economic recovery or the Kremlin’s commitment to building a market economy.”

The suspension of the deal whereby US oil giants Exxon and Mobil would take a stake in Yukos is likely to be only temporary, he said. “To the extent that the market was pricing in the imminent announcement of Russia’s largest ever foreign direct investment deal, it will be disappointed and sell down accordingly. However we do not believe the deal has been chased away permanently so the disappointment will be muted.”

Alexei Moisseev, Renaissance Capital’s fixed income strategist, said the recent double upgrade of Russia by rating agency Moody’s upgrade would reduce the impact of the arrest on the Russian fixed income market. “ With Russia now having investment grade, Moody’s have explicitly stated that political risks should not have any impact of the country’s creditworthiness. We tend to agree with this statement.”

But Alexander Shokhin, president of the Higher School of Economics in Moscow, said that market falls showed that the market was treating the arrest of the Yukos chief seriously. "The market is an objective indicator, and the fact that the market has reacted to Khodorkovsky's arrest by falling means that those who do the actual trading on the stock market have reacted to this as a systemic event, and not by any means an isolated incident,” he warned.