The ruble plummeted into a freefall, losing as much as 19percent as panic swept across Russian financial markets after asurprise interest-rate increase failed to stem the run on thecurrency.

The ruble plunged to as weak as 80.10 per dollar, a record low,before trading at 72.90 by 5:18 p.m. in Moscow, as Russiansscrambled to convert their money into dollars amid concern thegovernment will implement currency controls to slow the outflows.Bonds fell as the RTS stock index tumbled the most in almost sixyears. Government officials will gather to discuss the financialcrisis engulfing the country.

“I am speechless,” Jean-David Haddad, an emerging-marketstrategist at OTCex Group in Paris, said in a message. “What afailure for the central bank. Russia would need to announce capitalcontrols today. That is the last solution.”

The scope of the ruble's retreat indicates policy makers arelosing control of the situation as the six-month, 49 percent tumblein oil saps the country of hard currency needed to sustain aneconomy that's sputtering under the weight of internationalsanctions. The currency's plunge, the biggest one-day drop in 16years, was exacerbated by concern that policy makers were pumpingmore rubles into the economy to prop up state oil giant OAORosneft, a move that effectively gives investors additional moneyto buy dollars.

The Russian government will hold a meeting on financial issuestoday, Prime Minister Dmitry Medvedev said. Officials may announcecurrency restrictions, money managers from Schroder InvestmentManagement Ltd. to Skandinaviska Enskilda Banken AB said. Suchlimits might endanger Russia's investment-grade rating, RoggeGlobal Partners Plc said.

Undermining Confidence

Ten-year government-bond yields jumped 317 basis points, to arecord 16.4 percent, today. The cost of insuring against losses ongovernment debt climbed to 601 basis points, the highest sinceMarch 2009, while the dollar-denominated RTS Index of equitiesplummeted to 5 1/2-year low.

The turmoil in the financial markets is undermining theconfidence of individuals as banks point to a surge in demand forconverting rubles into dollars. Khanty-Mansiysk Otkritie Bank, theretail arm of Russia's second-largest private lender, saidforeign-exchange demand was three to four times above the dailyaverage today.

Russia could impose capital controls by making it more difficultfor depositors to swap their cash into hard currency or byrequiring exporters to convert some of their earnings into rubles,Per Hammarlund, chief emerging-markets strategist at SEB, said bye-mail from Stockholm.

“Our traders are informing me that we see no bids to buyrubles,” Hammarlund said. “I thought 17 percent would give them atleast a month of breathing space. We next have to look at theexperience in 1998-1999. We are also one big step closer to capitalcontrols.”

The ruble has plummeted 55 percent this year even after 11.5percentage points of increases took the key interest rate to 17percent and the central bank spent more than $80 billion oninterventions.

The costs of the depreciation in ruble, which has lost 54percent of its value this year, are steep as inflation hovers at amore than three-year high and currency interventions drain thenation's reserves. Russia's cash pile has fallen to a five-year lowof $416 billion as the central bank spent more than $80 billionthis year trying to slow the ruble's biggest annual retreat since1998.

The boost in Russian borrowing costs, which happened in asurprise announcement just before 1 a.m. in Moscow, was the biggestsince rates soared past 100 percent in 1998.

“If such a rate hike, such a shot of medicine, doesn't help theruble, then interventions won't help either,” Artem Roschin, aforeign-exchange dealer at Aljba Alliance in Moscow, said by phone.“There's no point in spending reserves.”

Draining Reserves

While the strain on reserves led the central bank to pushforward plans last month for a freely floating ruble, policy makersspent more than $6 billion on interventions since OPEC unleashed aselloff in oil after its Nov. 27 decision to keep outputunchanged.

Brent crude, the grade of oil traders look at for pricingRussia's main export blend, tumbled 3.6 percent to $58.86 a barrelin London today. Since the country derives about half of budgetrevenue from oil and gas industries, the weaker ruble is offsettingsome of Brent's 47 percent slide this year.

Russia's gross domestic product may shrink 4.5 percent to 4.7percent next year if oil averages $60 a barrel under a “stressscenario,” the central bank said yesterday. Net capital outflow mayreach $134 billion this year, more than double last year'stotal.

Three-month implied volatility, a gauge of expected swings inthe currency, surged 11 percentage points to 56 percent today, thehighest level since 2005, according to data compiled byBloomberg.

“It's very hard to stop the panic since everyone is bettingagainst the ruble,” Vadim Bit-Avragim, a money manager at KapitalAsset Management LLC in Moscow, said by phone. “The central bankwas too late with its move. Without oil and the economystabilizing, the ruble won't rise.”

–With assistance from Matthew Oakley and Lilian Karunungan inSingapore, Elena Popina in New York, and Lyubov Pronina inLondon.

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