MOSCOW (Reuters) - Russian stocks and bonds plummeted on Monday and the central bank hiked interest rates, burning its way through $10 billion (5 billion pounds) of its reserves to prop up the rouble as markets took fright at the escalating tension with neighbouring Ukraine.
Investors were ditching all Russian assets alike - the rouble, stocks and bonds. The market capitalisation of the Russian rouble-denominated MICEX stock index fell $58.4 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".
Traders estimated that the central bank spent $10 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 was down 2 percent to 36.49 against the dollar and it was also down 1.5 percent to 50.30 against the euro, trading at all-time lows.
The MICEX index of Russian shares tumbled 11.5 percent to 1,280 points and the dollar-denominated RTS collapsed 12.7 percent to 1,106.8 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 neighbour in Moscow's biggest confrontation with the West since the Cold War.
The West has been talking about sanctions, but some investors and economists reckon that such things as limiting trade with Russia, are still a far way off. Europe remains hugely depend on Russia's energy, importing a third of its gas from Russia.
And while the trade between the United States and Russia is limited, some U.S. companies, such as ExxonMobil and Boeing, have a huge presence of 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 lost 14.5 percent, while shares in state banks Sberbank were down nearly 15 percent and VTB fell 17 percent.
Russia's oil major Rosneft lost an estimated $5 billion in market capitalisation on Monday. This suggests that British BP, 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 behaviour 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, was the crash of the 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 already 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.
Traders said that if it weren't for the central bank's presence on the market, the rouble could have weakened to as far as 37.5 roubles per dollar already today. Credit Suisse see the rouble weakening beyond 37 rouble per dollar in coming days.
For now, the central bank seems well-equipped to defend the currency, having $493.4 billion in gold and foreign exchange reserves at its disposal.
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.
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(Additional reporting by Daria Korsunskaya, Vladimir Abramov, Vladimir Soldatkin,; Ian Bateson, Polina Devitt and Jason Bush; Writing by Lidia Kelly; Editing by Jeremy Gaunt and Giles Elgood)