* Investors watch for progress, intent of crackdown
* Looking for signs of political motivation for moves
* Could raise Russia-style security of investment worries
* Nigeria faces same banking issues as Western economies
By Peter Apps, Political Risk Correspondent
LONDON, Aug 21 (Reuters) - How foreign investors react to Nigeria's crackdown on corruption and bad practice in its banking sector will depend whether they come to see it as genuine, or a political witchhunt that could stir up social unrest.
"It depends whether it turns out to be a broad-based, credible clampdown or it moves to target specific individuals, for politically motivated reasons," said Elizabeth Stephens, head of credit and political risk analysis at London insurance brokers and consultancy Jardine Lloyd Thompson.
"If it accentuated the north-south divide and exacerbated intra-elite tensions, that would be particularly worrying. Nigeria has been criticised for ineffectively regulating its banking sector and in principle greater oversight should be a good thing."
Last Friday, Nigeria sacked the senior managers of five banks and injected $2.6 billion into them. The charge was bad governance and poor leadership had left the banks so weakly capitalised they presented a systemic risk.
On Wednesday, the central bank published a list of 200 individuals and institutions it said were bad debtors, a list that read like a Who's Who of the Nigerian business elite -- an unheard-of move in a country often viewed as a byword for corruption.
Ratings agency Fitch said on Friday the move should strengthen Nigeria in the long run, although uncertainty over the issue helped undermine the naira earlier this week.
Most experts see investors showing short-term caution, staying on the sidelines as they wait to judge the government's scope and depth of the intervention.
"Overall, it could be a positive thing. In recent years, many have talked up the banking boom as being the answer to a lot of Nigeria's economic troubles but in fact it has become one of its key problems, and has fallen short of its contribution to the real economy," said Control Risks West Africa analyst Rolake Akinola.
"The question is what actually happens next. It's important to ensure that reform doesn't stall or that the central bank is not seen to become politically driven in the way that it pursues its clamp on banks or individuals."
LEVEL, STYLE OF INTERVENTION
Nigeria's slow progress against more general corruption under current president Umaru Yar'Adua, is seen as reducing the prospects for serious progress on banking sector reform.
Few believe Nigeria has the potential to see a resurgence in state authority on the scale seen in Russia when Vladimir Putin took over from Boris Yeltsin in 2000 and clamped down on the oligarchs and organised crime that pervaded the business world.
But a sustained crackdown in Nigeria could have a similarly mixed investment impact as that seen in Russia a decade ago.
The highest-profile victim of Putin's assault was oil giant Yukos and its owner Mikhail Khordorkovsky, who was jailed for corruption and who saw his company dismantled.
That unnerved investors, leading many to question how safe their money was in Russia. The struggle of oil group BP for control of its local subsidiary TNK-BP and Norwegian telecom Telenor on going legal bid to retain its stake in mobile operator Vimpelcom have kept the issue in focus.
At the same time, Putin is credited with bringing greater economic and political stability -- a positive for investors.
Similarly in Nigeria a crackdown may put some foreign investments at risk but at the same time not doing anything to tackle the banking problem also comes with a risk.
Ultimately, Nigeria is now struggling with the same issues of striking a balance of government and regulatory intervention in the banking sector facing Britain and the United States in the aftermath of the financial crisis.
"That in itself is a sign of maturity, but only if Nigeria will be one of those countries that uses this crisis to spur movement toward regulatory reform," said Control Risks' Akinola. "Of course, only time will tell how far that will go." (Editing by Matthew Jones)