Olga Timofeyeva, who chaired the three-judge panel, told journalists that the court had rejected Lebedev's appeal to be released on bail. He remains in Lefortovo prison.

The Moscow City Court's decision had been much awaited as a sign of which way the Kremlin wind was blowing in the Yukos affair, which began three weeks ago with Lebedev's arrest and has since ballooned to include allegations of possible tax evasion by Yukos and of murder by other company officials.

The showdown has prompted leading businessmen to appeal to President Vladimir Putin to defuse a situation they say could set a precedent for a new carve-up of property and unravel the stability that has been the president's main achievement so far.

Before the ruling, Lebedev's lawyers had expressed hope that Putin's recent ambiguous statement of opposition to jailing people during investigations of economic crimes was a signal that the man seen as the financial genius behind Mikhail Khodorkovsky's empire would be released. Some observers saw that prospect as a sign a compromise could be in the offing.

But Wednesday's rejection of Lebedev's appeal for bail came as a clear sign both sides were digging in for trench warfare in a battle that pits Khodorkovsky against forces within the Kremlin and their allies in the law enforcement agencies.

"What's clear from this is that not one of the sides is ready to back down and find a compromise," said Alexei Moiseyev, an economist at Renaissance Capital. "The end is far from sight in this battle."

The stock market dipped another 1.3 percent on the news, and shares in Yukos fell almost 3 percent. The market has lost almost $20 billion in value since the affair began.

Khodorkovsky is showing little sign he is ready for a truce either, escalating his rhetoric against the Kremlin faction of former security service officers that he sees as being behind the campaign against his company.

In an interview with regional journalists that was published in Moskovskiye Novosti on Tuesday, Khodorkovsky accused the state of dominating economic and political life.

"An oligarchic system is better than dictatorship and an authoritarian regime," he said. "But there's no reason for hope; we still don't live in an oligarchic country. We have been living in a slave-owning state for thousands of years. And we ourselves think there is only one tsar while the rest of us are lackeys.

"To say that Khodorkovsky has political power is just ridiculous. We have one God only -- the state. And we all offer our lives and our children up to it as sacrifices and are glad when it eats them up."

Analysts have said the attack on Khodorkovsky's empire is an attempt to reduce his political influence. Putin has openly lashed out at big business for blocking the passage of key reforms in the State Duma. Khodorkovsky, meanwhile, has openly been seeking to lock in his own loyal faction in the Duma.

In the interview with regional journalists, Khodorkovsky said he considers it his duty to be involved in politics. "I personally as a citizen not only have the right to have, but I have to have, my own political views and I have to defend them," he said. "And if we don't do this, then the prosecutors are going to determine our political life."

Kremlin-connected political analyst Sergei Markov said Khodorkovsky risked provoking even stronger ire from the Kremlin by so openly lashing out at the state. "The crisis is deepening," he said. If Khodorkovsky does not back down, "the next step will be the destruction of his empire."

"He cannot win against the Kremlin," Markov said, saying a step back by the Kremlin would mean a return to the oligarch-dictated policies of the Yeltsin era. He said, however, it was unlikely the rest of big business would dare to join Khodorkovsky in his battle.

Markov said a high-placed source in government had told him that other oligarchs were already running to the White House to ask for pieces of a collapsing Yukos empire.

Khodorkovsky appears to have members of the U.S. political elite behind him. A senior U.S. diplomat has called on the Russian government to "clarify" the situation around Yukos and has raised questions about what the campaign against the company means for democracy.

Washington policy adviser Richard Perle earlier this week spoke out in defense of Khodorkovsky, who, ironically, was earlier reviled by the West as the worst shark in Russia's robber capitalism because he blatantly cheated foreign investors as he sought to gain control over the oil major he had won in a rigged privatization auction.

With those battles over, in 2000 he began to improve corporate governance and embarked on a PR drive that made him the darling of Western markets. Now his fate is seen by Perle as key for the future economy.

"It's possible already to say that real damage is being done to the prospects for future Russian economic growth and development by what appears to be an arbitrary, capricious and vindictive campaign against a private company," Perle said Monday at a seminar held by the Carnegie Moscow Center.

In his interview, Khodorkovsky repeated his claims that the charges against Lebedev were unfounded. On the eve of Wednesday's bail hearings, however, prosecutors told Vedomosti and Izvestia they had evidence that Group Menatep, the holding company that contains the assets of core Yukos shareholders and which Lebedev chairs, had underpaid for a 20 percent stake in the Apatit fertilizer producer in 1994 by almost $400 million. Lebedev is under arrest on charges he swindled the state in that privatization deal.

Lebedev's lawyers and Menatep general director Oleg Ashurkov said Wednesday that the court hearings seemed to be skewed against them from the start.

"I have a feeling all this has gone according to a planned scenario that was scripted before the hearings began," Ashurkov said. He cited the judge's approval of the prosecutors' appeal to close the hearings to the press and the public.

"There are no state secrets and no commercial secrets in this case," he said. "Today we were shown that one of the main principles of the judicial system -- glasnost -- is not in force here.

"What has happened is a sign of the unprecedented pressure that has been brought on the judge," he said.

Lebedev's lawyer Yevgeny Baru claimed the judges had refused to review additional material in defense of Lebedev, but had agreed to examine new papers presented by the prosecutors, which, he said, they used to shore up their case to keep Lebedev in jail by arguing he would flee. Baru denied his client would flee.

"Lebedev is not a terrorist, not a killer, not a violent maniac and of course he in no way represents a threat to society," he said, adding that his client was suffering from high blood pressure.

Prosecutors at the court refused to comment on the case Wednesday.

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Yukos Case

The Moscow Times, July 24, 2003