The ruble resumed its dramatic slide on Tuesday, a day after the Russian central bank floated the currency that has been driven sharply lower by falling oil prices and economic sanctions imposed over Russia's policy in Ukraine.
Stability for the currency is one of the main achievements of President Vladimir Putin's 14-year rule, and its slide has revived memories of the currency collapse that shut banks and wiped out the savings of Russians a year before he took power.
The currency has lost nearly 30 percent of its value against the dollar so far this year, most of that in the last three months as sanctions hit the ability of banks and companies to refinance debts and tumbling oil prices hurt government revenue.
A new threat to a two-month-old cease-fire in eastern Ukraine has hurt hopes that sanctions could be lifted soon.
Western countries say that Putin has dispatched more troops to the border with his neighbor in recent days and sent armored columns to defend enclaves the Kremlin now calls “new Russia.”
A senior EU official said the bloc would discuss next week whether to increase sanctions still further.
Moscow denies that its troops operate in Ukraine, although some Russian soldiers have died fighting there.
Averting repeat of 1998
The Russian central bank is trying to avert a repeat of the ruble crash of 1998, which bankrupted the country's financial system, impoverished its citizens and led to a period of political turmoil that ended when Putin took power a year later.
The bank has a huge $430 billion cash pile of reserves. But even that has limits, and after spending as much as $2.5 billion a day to prop up the currency in recent weeks it announced last week that it would halt massive regular interventions.
On Monday it officially set the currency free to float, saying it would now target inflation rather than the exchange rate, a step it had planned by the end of the year.
Although regular interventions will stop, the bank said it would keep the market in check and punish those betting against the ruble by carrying out large, ad hoc interventions.
On Tuesday, the ruble lost around 2.2 percent against the dollar by mid-afternoon, falling to 46.86 rubles per dollar after gains in the previous two sessions. It lost 2.5 percent to trade at 58.22 versus the euro.
The currency was nevertheless still above a record 48.6 to the dollar set during wild swings on Friday, with traders now cautious about testing the bank's firepower, especially after Putin promised to avert a crash.
“The rouble gained yesterday on verbal interventions from officials including President Vladimir Putin, but those words have to be followed up by action. The market still expects more from the central bank,” said Yury Tulinov, head of research for capital markets and investment banking at Rosbank.
The central bank, Putin and Prime Minister Dmitry Medvedev have all spoken in support of the ruble in recent days, blaming speculation by private banks for its slide.
Medvedev told a government meeting on Tuesday there were no fundamental reasons for the ruble to weaken further and ruled out restrictions on foreign currency sales.
EU foreign ministers will discuss new sanctions on Russia next week, the EU's foreign affairs chief said on Tuesday, following fighting between pro-Russian separatists and Ukrainian forces in the past week that put a September 5 cease-fire in doubt.
The ruble was also pushed down by further falls in the oil price, hurting a country that relies for most of its income on energy exports. Brent crude was off more than half a percent by Moscow's late afternoon.
Analysts also said demand for dollars remained high, given sanctions restricting Russian firms' access to international capital markets. Companies need dollars to meet an onerous foreign debt repayment schedule before the end of the year.
The central bank has already raised its key interest rate by a cumulative 400 basis points this year and has spent over $70 billion in interventions to defend the currency and curb capital flight.
On Monday, the bank cut its growth forecasts to almost zero for this and the next two years and predicted sanctions would remain in place until the end of 2017.
David Kohl, a forex analyst at Swiss bank Julius Baer, was even more pessimistic, saying his bank saw an economic contraction of 0.5 percent in Russia next year.
“Russia's confrontational policies in Ukraine have worsened fundamental headwinds, and the most recent decline in oil prices has removed the last supporting pillar for the currency," Kohl said.