MOSCOW - The Russian central bank early Tuesday announced a dramatic hike of its key interest rate from 10.5 to 17 percent after the ruble plunged to a fresh record low.
A Russian ruble coin is pictured in front of the Kremlin in central Moscow, November 6, 2014
"This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks," the central bank said in a statement posted on its website around 1:00 am local time (2200 GMT Monday).
The ruble on Monday suffered a mini-crash, falling by 9.5 percent in a single day despite repeated interventions by the central bank, with the latest apparently taking effect on Monday afternoon.
The slide came as the bank warned the low oil price could trigger a contraction of nearly five percent next year and as tensions surged with the United States over the Ukraine crisis.
A dramatically higher interest rate -- which was set at 5.5 percent at the beginning of the year -- now threatens to further strangle the economy.
The ruble broke through the level of 64 to the dollar and 78 to the euro for the first time even though the Bank of Russia has already spent about $6 billion (4.8 billion euros) so far this month to slow the currency's slide.
Russian news agencies said the ruble briefly jumped from 61 back to 60 on the dollar at around 1300 GMT, possibly due to the latest central bank intervention, but it did not stop a further slump.
Having lost over 49 percent of its value against the dollar this year, the ruble's slide is now worse than the 48 percent of the hryvnia in Ukraine, which is fighting a war and is on the brink of bankruptcy.
Russia's support of rebels in eastern Ukraine and its annexation of Crimea brought on Western sanctions that gave the ruble its first knock earlier this year.
Geopolitical tensions have stepped up in recent days following votes by US lawmakers approving more sanctions against Russia and the delivery of up to $350 million worth of US military hardware to Kiev.
However the heart of the problem is plunging oil prices.
Half of Russia's revenues come from oil and gas, and the drop in the price of crude oil by half in the past six months has dealt a body blow to the country's finances and Russians' confidence in the ruble.
- Ruble in 'free fall' -
The ruble's fall is "driven by sentiment and fear," said Chris Weafer, who runs Macro Advisory consultancy.
"The ruble is now in free fall based on this fear factor," he added.
"The normal rules of economics don't apply," Weafer said, adding that "the government has to find a way to stop this decline and restore confidence."
Economist Maxim Buyev wrote in the Vedomosti daily that "the government must offer a clear plan of reforms" to restore confidence in the currency.
Neil Shearing, chief emerging markets economist at London-based Capital Economics, said the ruble's slide has led to "a growing sense that the currency crisis is spiralling out of control".
He said it was also increasing speculation that government could undertake stricter measures like capital controls.
"In the absence of an improvement in relations with the West and a lifting of the economic and financial sanctions on Russia, the appeal of capital controls and external debt default will grow," he said.
Bank of Russia chief Elvira Nabiullina said last week that the bank is prepared to spend up to $85 billion over the next year to prop up the ruble if necessary.
- Shrinking economy -
The central bank on Monday provided the latest grim outlook for the Russian economy, predicting in a "stress scenario" written in its quarterly report on monetary policy a contraction of 4.5-4.8 percent next year if oil prices remain at $60.
The government's 2015 budget is balanced on the assumption of selling oil at $95 per barrel, meaning the government's finances will be strained if there is not a quick rebound in crude prices.
Vedomsti reported that the government plans to cut budget spending by 10 percent in 2015. The cuts would impact transportation programs as well as spending on space, aviation and development of the Far East, the report said.
The central bank also said inflation will peak at 11.5 percent in the first quarter of 2015 before going down, adding that it will go back to the target rate of four percent only by the end of 2017.