By Lidia Kelly and Vladimir Abramov
MOSCOW (Reuters) - Russian stocks and bonds fell sharply and the central bank hiked interest rates and burned through $10 billion of its reserves on Monday to prop up the rouble as markets took fright at the escalating tensions with neighboring Ukraine.
Investors were ditching all Russian assets alike - the rouble, stocks and bonds. 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 spiraling 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 rouble-denominated MICEX index of Russian shares tumbled 10.3 percent to 1,295.4 points and the dollar-denominated RTS collapsed 11.8 percent to 1,118.2 points.
"There's a sell-off of everything right now," said Artem Argetkin, a trader at BCS in Moscow, said.
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."
Ukraine called up military reserves on Sunday and Washington threatened to isolate Russia economically after President Vladimir Putin declared 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
"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."
BROADER CONSEQUENCES
Still, market players, fearing broader consequences, were selling stocks, including major blue chips. Gazprom
"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.
"And the central bank does it quite openly and absolutely explicitly," said Pavel Demeschik, a dealer at ING Bank in Moscow. There has been no statement from the central bank on possible changes to its currency market interventions scheme.
Demeschik 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.
(Additional reporting by Daria Korsunskaya; Ian Bateson, Zlata Garasyuta, Polina Devitt and Jason Bush; Writing by Lidia Kelly; Editing by Jeremy Gaunt and Giles Elgood)
