MOSCOW Russian stocks and bonds plummeted on Monday and the central bank hiked interest rates, burning its way through as much as $12 billion of its reserves to prop up the rouble as markets took fright at the escalating tension with neighboring Ukraine.
Investors were ditching all Russian assets alike - the rouble, stocks and bonds. The market capitalization of the Russian rouble-denominated MICEX stock index fell some $60 billion since Friday, more than the $51 billion Russia spent on the Winter Olympics in Sochi last month.
The Ukrainian hryvnia has firmed since curbs were imposed on deposit withdrawals last week, but Ukrainian eurobonds fell sharply.
Russia's central bank unexpectedly raised its key lending rate - the one-week repurchasing agreement - to 7 percent from 5.5 percent, in an attempt to stem capital flight.
The central bank did not mention Ukraine in its statement, but said the decision to raise rates was aimed at preventing "risks to inflation and financial stability associated with the recently increased level of volatility in the financial markets".
The central bank said separately it had changed its rules for the rouble's managed float by raising the amount needed to shift the currency's trading corridor by nearly fivefold to $1.5 billion, saying again it was a move "to prevent risks to financial stability by limiting exchange rate fluctuations".
ING Bank estimated that the central bank spent $10.5-$12 billion, or 2 percent, of its gold and foreign exchange reserves keeping the rouble from spiralling down too fast.
"It goes without saying that the extent to which (central bank moves are) successful will depend largely on political rather than economic developments," Neil Shearing, chief emerging markets economist at Capital Economics, said.
The rouble closed 2 percent down at 36.50 against the dollar and 1.6 percent lower at 50.38 against the euro, its at all-time lows.
The MICEX index of Russian shares tumbled 10.8 percent to close at 1,288.8 points and the dollar-denominated RTS .IRTS collapsed 12 percent to 1,115.1 points.
"Frightened by the situation around Ukraine, investors held a selling spree of Russian assets," said Dmitry Kulakov, head of equity trading at Olma investment house.
Deputy Economy Minister Andrei Klepach told Reuters on Monday that he expects "hysteria" on the markets to subside, but it was uncertain when that would happen.
"What lies ahead of us is a period of more confrontation and difficulties. For us, that will mean more complicated relations with the European Union, the (United) States, with all the resulting consequences," he said.
Ukraine called up military reserves and Washington threatened to isolate Russia economically after President Vladimir Putin said he had the right to invade his neighbor in Moscow's biggest confrontation with the West since the Cold War.
The West has been talking about sanctions, but some investors and economists say moves such as limiting trade with Russia are some way off. Europe remains hugely dependent on Russia's energy, importing a third of its gas from Russia.
And while trade between the United States and Russia is limited, some U.S. companies, such as ExxonMobil XOM.M and Boeing (BA.N), have a large presence in Russia.
"Is Russia going to be cut off from the world? That is very unlikely given what Russia provides to the world, which are oil, gas, raw materials," Alexis Rodzianko, president of the American Chamber of Commerce in Russia, said.
"Sanctions are less than absolutely likely because sanctions hurt both sides, maybe even the side applying the sanctions more than the side being sanctioned."
Still, market players, fearing broader consequences, were selling stocks, including major blue chips. Gazprom (GAZP.MM) lost 13.9 percent, while shares in state bank Sberbank (SBER.MM) were down nearly 15 percent and VTB (VTBR.MM) fell 17.5 percent.
Russia's oil major Rosneft (ROSN.MM) lost an estimated $5 billion in market capitalization on Monday. This suggests that British BP (BP.L), which holds a 19.75-percent stake in Rosneft, has lost nearly $1 billion.
"The Russian market has always been dependent on foreign investors," said Andrei Kuznetsov, strategist at Sberbank CIB in Moscow. He estimates about 70 percent of Russian freely traded shares is controlled by foreigners and a big portion of foreigners - about 40 percent - is from the United States.
Konstantin Gulyaev, chief market analyst at Capital investment house in Moscow, said Monday's market behavior was pure panic.
"The most important for our market is that the 'Ukraine factor' does not acquire some global factor, as it was in 2008 when after the military conflict in Georgia, came the crash of Lehman Brothers," Gulyaev said.
The impact of the central bank's rate rise on the rouble currency, which had lost nearly 8 percent against the dollar before Putin's declaration, remains doubtful. Traders said the central bank has been offering $1 billion to prop up the rouble every time the currency falls two-three kopecks.
The central bank discloses its interventions amount with a two-day lag, but it confirmed on Monday that is has "increased its involvement" in the foreign currency market.
The Central Bank First Deputy Governor Ksenia Yudaeyva said the bank may boost its presence in the market further and that it still has "big room" to raise interest rates.
For now, the central bank seems well-equipped to defend the currency, with $493.4 billion in gold and foreign exchange reserves at its disposal, but Monday's estimated $10 billion spend added up to a 2 percent splurge in one day.
Traders said that if it weren't for the central bank intervention, the rouble could have weakened to as far as 37.5 roubles per dollar. Credit Suisse sees the rouble weakening beyond 37 roubles per dollar in coming days.
Many privately run exchange booths, where the spread between buying and selling dollars increased up to tenfold from an average of 20 kopecks over the weekend, ran out of the greenback, with Russians rushing to exchange their roubles.
"We were not ready for this, we have not stocked up," said a teller at a small exchange, adding that her booth, which is open 24 hours a day, ran out of dollars by Sunday morning.
(Additional reporting by Daria Korsunskaya, Zlata Garasyuta, Vladimir Abramov, Vladimir Soldatkin, Ian Bateson, Polina Devitt and Jason Bush; Writing by Lidia Kelly; Editing by Jeremy Gaunt and Philippa Fletcher)