The Russian currency plunged almost 70 percent against the German mark Wednesday after the central bank voided trading against the dollar on the Moscow Interbank Currency Exchange (MICEX).
"It's extremely serious," said Dan McGovern, the head of emerging markets research for Morgan Stanley Dean Witter. "The central bank is trying to restore confidence, but it only has administrative means to do it. No one trusts the ruble. ... The interest rate wants to go higher."
Russia's deepening crisis led to early declines in European markets and in other emerging markets' currencies. Germany's Deutsche Bank, with wide exposure to Russia, saw its shares drop more than 6 percent to approach a six-month low.
The Russian currency crash came after the government announced a plan to swap about 250 billion rubles ($32 billion) of debt for new bonds in a transaction that could return investors less than 30 cents on the dollar.
The government has released few details about the terms of its debt-restructuring plan, announced late Tuesday night, leaving one Western investor with a $150 million portfolio in Russia "extremely angry and extremely confused."
Russia's central bank intervened heavily Tuesday on the currency markets to keep the ruble within its newly established trading corridor, but officials were helpless Wednesday to stop the flight of capital into safer hands. In early MICEX trading, the ruble fell 5 percent to 8.26 rubles to the dollar, prompting a trading halt and then the decision to void all of the day's transactions. The ruble had dropped 9 percent against the greenback on Tuesday.
Trading continued against the mark, with the German currency closing up 69 percent to 7.6 rubles.
Given the dollar-to-mark exchange rate, the effective value of the ruble was about 13.8 per dollar - well beyond the 9.5-ruble floor of the trading corridor the central bank set last week.
Russian announced last week it would allow the ruble to drop by as much as one-third to 9.5 rubles per dollar by the end of the year. The government devised a plan to convert short-term debt to longer-term securities, resulting in huge losses for those holding bonds. Since then, the ruble has fallen more than 40 percent against the U.S. currency.
The central bank offered little explanation for its actions, and no word was forthcoming from top Russian officials. President Boris Yeltsin, who is under fire for the devaluation and sudden change in the government, made no public appearances or statements Wednesday. His spokesman said he was in his dacha, preparing for next week's summit with President Clinton.
Viktor Chernomyrdin, the former prime minister whom Yeltsin tapped on Sunday to again head Russia's government, did his part to pass the bucwithout giving any concrete assurances about the situation.
"Financial and economic policy is a question to which I am giving my attention minute-by-minute," ITAR-Tass quoted Chernomyrdin as saying. "I am extremely dissatisfied with the work of the central bank over the last two days."
Chernomyrdin flew to the Ukraine to confer with Ukraine President Leonid Kuchma and Michel Camdessus, managing director of the International Monetary Fund.
Other officials were still unable to provide further information on the opaque debt-restructuring plan. Western analysts are calling the plan an effective default that will hit investor confidence in Russia for years to come.
"We still don't know if these new vehicles will be traded on open markets or whether we are stuck with worthless pieces of paper," said an angry investor.
Written By Margaret Coker, Moscow correspondent for CBS MarketWatch