TREASURIES-Yields rise in line with stocks after strong U.S. confidence data
* U.S. 5-year note auction shows strong central bank demand (Adds comment, 5-year note auction results, updates prices)
* Rouble-denominated MICEX drops 2.3 percent
* Rouble down 1.6 percent against dollar
* Russian debt insurance costs soars to 2-month highs (Updates shares, currency after the market closing)
By Polina Devitt
MOSCOW, July 17 Russian shares fell 2.3 percent on Thursday after Washington imposed its toughest economic sanctions yet on Russian energy, financial and defence firms, also hitting the rouble and the country's sovereign dollar bonds.
The U.S. government imposed sanctions on Wednesday on some major players in the Russian economy over what Washington says is Moscow's reluctance to curb violence in Ukraine.
Sanctions, which in effect close medium- and long-term dollar funding, were imposed on Russia's No. 1 oil producer Rosneft, its No. 2 gas producer Novatek, its No. 3 bank Gazprombank and state-owned Vnesheconombank (VEB).
News that nearly 300 were killed when a Malaysian Airlines plane crashed in eastern Ukraine came after the market close.
The rouble-traded MICEX pared early losses of 3.1 percent to close 2.3 percent down at 1,440.63 points; the dollar-traded RTS index was down 3.8 percent at 1,299.03 points.
Russian Prime Minister Dmitry Medvedev said the sanctions were "evil" and that these moves would not help Ukraine and would fuel anti-U.S. sentiment in Russia.
Shares in Rosneft pared losses to 4.3 percent after falling 6 percent. Oil-trading operations at Rosneft will not, however, be hurt by the sanctions, traders said.
Novatek was down 5.5 percent compared with an earlier decline of 9 percent. The company said its major projects would go ahead despite the sanctions.
"Despite the eye-catching headlines, the steps stop short of the much discussed, but yet not pursued, 'sectoral sanctions'," VTB Capital said in a note. "That said, for the first time they touch - even if only lightly - major Russian corporations."
The threat to Rosneft and Novatek from the sanctions is that Europe may follow suit and impose the same limitations on borrowing from European banks, Alfa Bank said in a note.
EU leaders said on Wednesday they would expand sanctions against Russia to target companies that undermine Ukrainian sovereignty and ask the European Investment Bank and the European Bank for Reconstruction and Development to suspend new lending.
Russia's Foreign Ministry reacted with disappointment that the European Union "succumbed to the blackmail of the U.S. administration and, contradicting its own interests, followed the path of sanctions" against Moscow.
The MSCI global emerging equities index was down 0.5 percent, while Russian sovereign dollar bonds slumped to multi-week lows and Russian debt insurance costs soared to two-month highs.
International payment systems Visa and MasterCard said the new U.S. sanctions did not affect their operations in Russia.
The rouble hit a six-week low against the dollar as stop-losses were triggered on short positions and was down 1.6 percent against it at 34.94.
It also lost 1.6 percent against the euro to trade at 47.24.
This left the rouble 1.6 percent weaker at 40.46 against the dollar-euro basket that the central bank uses to guide the currency's nominal exchange rate.
For rouble poll data see
For Russian equities guide see
For Russian treasury bonds see
Russia in graphics: link.reuters.com/dun63s (Additional reporting by Olga Popova, Vladimir Soldatkin, Vladimir Abramov and Katya Golubkova; Editing by Louise Ireland)
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