July 18 (Bloomberg) -- The decision of a Russian court to imprison opposition leader Alexey Navalny is a perversion of justice, of course. It is also much more than that: In one stroke, the regime of President Vladimir Putin has legitimized one of its most potent critics and moved the country closer to the kind of economic malaise that could bring that very critic - - or someone much worse -- to power.

In the myopic view of Kremlin officials and their allies at the head of large state-controlled companies, the verdict is a victory. A person who made it his mission to expose their corruption, and who had been mounting a campaign for mayor of Moscow, will now spend five years in a Russian prison. Navalny’s sentence will stand as a warning to any who would follow his example.

In the longer view, though, officials are giving political legitimacy, even martyrdom, to a divisive figure. Aside from being a fearless activist and powerful orator, Navalny also displays xenophobic tendencies that have made many middle-class liberals hesitant to support him. Earlier this month, he signed on to a nationalist statement supporting riots in which residents of the small town of Pugachev targeted darker-skinned people from the southern Caucasus region. Some in the opposition even suspected he had been planted by the Kremlin to lead them astray.

Now Navalny has earned his credentials, at great cost to himself and those close to him. As commentator Maxim Trudolyubov put it in the newspaper Vedomosti: “Navalny has agreed to pay with his freedom, and that means he’s for real. It’s the answer to those who had doubts.”

No less important is the way the verdict cements Russia’s reputation as a terrible place for entrepreneurs and investors. To convict Navalny, the court had to interpret as theft a normal business transaction, in which trading firm VLK purchased timber from state-owned company Kirovles then sold it at a higher price. Evidence that VLK had paid the going market rate had no effect. The decision gives corrupt authorities throughout Russia a new tool to extract bribes from businesses: Pay up, or we’ll put you in jail for making money.

Russia’s economy can go a long way on high oil prices, but in the longer run, the dismal business climate will tend to undermine the relative prosperity on which Putin has built his popularity. At the extreme, economic malaise has the potential to produce a revolt much more pervasive and virulent than last year’s largely middle-class demonstrations in Moscow, and could bring to power people willing to pander to the masses’ basest tendencies.

When anti-government protests started in December 2011, Putin still had a chance to become his country’s legitimate leader by opting for something closer to free and fair presidential elections. Now he has chosen his course. It’s not likely to end well for him or his country.

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