Mikhail Khodorkosvy was arrested in Siberia and is being held in an overcrowded prison in Moscow.
Khodorkosvy is the billionaire boss of Russia's biggest oil company Yukos. Shares in the company fell by seven percent following news of his arrest.
Commentators believe that Khodorkosvy's detention could lead to political suicide for one of the Kremlin's most powerful men, Vasily Shakhnovsky.
Shakhovsky, who owns four percent of the oil company Yukos, had been nominated to represent the upper chamber of the Russian parliament.
Now, state prosecutors want to investigate Shakhovsky's connections with billionaire Khodorkosvy. They have asked a court to the lift the immunity of the key shareholder, so that he can be questioned about his connections to Yukos.
Russia's political analysts believe that the company may have been put under the spotlight by President Vladimir Putin, and the Kremlin ''hawks'' who are determined to succeed in Russia's elections for parliament in December and presidency early next year.
Khodorkosvy is lending his support to two small liberal parties for the parliamentary polls, but analysts believe that the Kremlin is more concerned about Khodorkosvy's presidential ambitions.
The impact on the Russian stock exchange has created tension in the country's stock exchange.
Russian Prime Minister Mikhail Kasyanov urged people to keep their calm and not to panic.
The political saga could strain relations between key western allies, upon whose economies Russia relies upon heavily to boost its own internal markets.
The US and the European Union have questioned whether the Khodorkovsky case may undermine the rule of law and deter future foreign investment in the country.