By Alexander Marrow

MOSCOW (Reuters) -The rouble tanked on Monday, slipping past 80 against the dollar, while stocks plunged to their lowest in over a year as Russian President Vladimir Putin called for the immediate recognition of two breakaway regions in eastern Ukraine.

Putin signed a decree recognising the breakaway regions in eastern Ukraine as independent entities, upping the ante in a regional crisis the West fears could erupt into war.

The rouble fell to as low as 80.0650 against the dollar during Putin’s lengthy televised address to the Russian nation but pared some losses as Putin announced his decision, which he said would find support among Russian people.

The sharp drop in the rouble from levels around 70 to the greenback seen just four months ago is expected to fuel already high inflation, one of the main concerns among Russians, which would dent the country’s already falling living standards.

By 1956 GMT, the rouble fell 2.7% to 79.37 against the dollar. It had been as strong as 76.1450 earlier in the session.

Against the euro, the rouble had lost 2.6% to 89.79 after hitting 90.7850, a level last seen in April 2021.

No Russian assets were left unscathed, with stocks cascading to their lowest since early November 2020 and bond yields, which move inversely to prices, soaring to their highest since January 2016.

The dollar-denominated RTS index finished the day 13.2% lower at 1,207.5 points and the rouble-based MOEX Russian index lost 10.5% to 3,036.9 points.

Yields on Russia’s 10-year benchmark OFZ bonds hit a high of 10.64%. The cost of insuring Russia sovereign debt against default also surged to its highest since early 2016 and both Moscow and Kyiv’s sovereign dollar bonds tumbled.

Goldman Sachs analysts said it now seemed plausible that geopolitical risks in the Ukraine-Russia standoff were starting to have a meaningful impact on global assets.

Comparing the rouble with its high-yielding emerging market peers was a good measure of the amount of risk premium still priced into the rouble, they said.

“On that basis, our latest estimates would put the risk premium from recent escalation at 9% based on Friday’s closing prices,” Goldman Sachs said.

DIPLOMACY VS. SANCTIONS

The prospect of a possible summit between Putin and U.S. President Joe Biden, as well as upcoming talks between the United States and Russia’s top diplomats on Feb. 24, had given investors a glimmer of hope earlier in the session.

Despite Moscow’s repeated denials of Western statements saying that it plans to invade neighbouring Ukraine, Russian assets have been hammered by fears of a military conflict that would almost certainly trigger sweeping new Western sanctions against Moscow.

Washington has prepared an initial package of sanctions against Russia that includes barring U.S. financial institutions from processing transactions for major Russian banks, three people familiar with the matter told Reuters.

Shares of Russia’s top banks Sberbank and VTB fell 20% and 17% respectively, underperforming the wider market.

Oil major Rosneft’s shares also dropped 13.3%.

(Reporting by Alexander Marrow and Andrey Ostroukh; Editing by Stephen Coates, Bernadette Baum, Tomasz Janowski, Andrew Heavens and Aurora Ellis)

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