Putin Foe Navalny Faces Jail as Investors Fret About Selloff

Alexey Navalny faces possible imprisonment tomorrow in the highest-profile case against a critic of President Vladimir Putin since the prosecution of former oil billionaire Mikhail Khodorkovsky.

A judge in Kirov, 900 kilometers (560 miles) northeast of Moscow, will rule on charges that Navalny defrauded state-owned timber company Kirovles of 16 million rubles ($493,000). Prosecutors have demanded a six-year prison term and a fine of 1 million rubles.

Political fallout from the case risks further unsettling the country’s financial markets, with Russian equities trading at the cheapest valuations based on estimated earnings among 21 emerging economies tracked by Bloomberg. Navalny, who’s campaigning to be Moscow’s mayor in September and wants to contest the next presidential election in 2018, denies any wrongdoing and says the case is payback for helping lead the biggest protests against Putin’s 13-year rule in 2011.

“A guilty verdict may trigger a new wave of protest against Putin’s regime and put even more pressure on Russian financial markets,” Dmitry Malykhin, who oversees $30 million in Russian assets at Moscow-based hedge fund Da Vinci CIS Opportunities, said by e-mail.

Navalny said today through his Twitter account that he registered to run for Moscow mayor in the Sept. 9 elections. Even if convicted tomorrow, Navalny can remain a candidate while an appeal is pending, Anna Veduta, his spokeswoman, said in a text message.

Stocks Rise

The 50-stock Micex Index climbed 0.5 percent to 1,417.69 by 3:15 p.m. in Moscow. Russia’s benchmark gauge trades at 5.4 times its 12-month estimated earnings, having lost 3.9 percent this year. That compares with a multiple of 10.6 times for companies in the MSCI Emerging Market Index, which has dropped 9.5 percent this year. Net capital outflows reached $54 billion last year and exceeded $38 billion in the first six months of 2013, preliminary central bank data show.

Navalny, a lawyer who’s campaigned to expose fraud and waste at state companies and corruption by officials, is the highest-profile opponent of Putin to face jail since former Yukos owner Khodorkovsky, once Russia’s richest man who is serving 13 years in prison under two separate convictions.

Khodorkovsky was detained in October 2003 after funding opposition parties and is serving a 13-year sentence following two convictions for fraud and tax evasion. A Moscow court cut his sentence to 11 years in December.

Putin Crackdown

More than 6,500 people have signed up to attend a rally against Navalny’s sentencing near the Kremlin tomorrow, according to a Facebook page set up by the organizers. Navalny helped mobilize tens of thousands of anti-Putin supporters in rallies in 2011 and last year, including a May 2012 protest that involved violent clashes with police. An additional 8,000 have signed up via Vkontakte, the popular Russian social network.

Putin, 60, has hardened his response against critics since winning a new six-year presidential term last year. Some protesters have been imprisoned while non-government organizations that get funding from abroad are being threatened with fines or possible closing unless they declare themselves foreign agents.

A Navalny jail term “may not be priced in by the market,” said Dmitri Kryukov, founder of Moscow-based investment firm Verno Capital, which has $230 million under management.

‘Negative Headline’

While Putin has called for improved legislation to safeguard property rights and stem capital flight, investors have cited the Navalny case as an example of Russia’s continuing failure to respect the rule of law. Khodorkovsky, 50, says he was targeted for financing opposition parties, an accusation the Kremlin denies. Yukos was sold in pieces, mostly to state-run OAO Rosneft, to cover tens of billions of dollars in back taxes.

A conviction for Navalny would be “another negative headline for Russia, another reason why funds will hold back and locals will continue to stash money offshore,” Tim Ash, head of emerging-market research at Standard Bank Group Ltd. in London, said by phone July 15. “Investors want a level playing field, strong and independent courts, they don’t want arbitrary, politically driven prosecutions.”

Navalny was defiant in a July 11 interview with the radio station Ekho Moskvy, accusing Putin and his billionaire associates of fabricating the criminal case against him to protect their wealth and saying that he expects to be found guilty and possibly imprisoned.

“When I see that in our country the oil and gas dollars flowing in huge quantities are openly plundered by Putin’s buddies, how can I stay on the sidelines?” he said. “I’m sure that sooner or later, I’ll be the one to throw them in jail.”

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