Russian markets fell sharply on Thursday after Washington unveiled new sanctions on Moscow over its alleged support for separatist rebels in Ukraine, targeting key state companies with the toughest measures to date.
Though the US sanctions fell short of a mooted targeting of entire sectors of the Russian economy, analysts said the measures were bound to have significant long-term effects, despite a defiant reaction from officials in Moscow.
In afternoon trading, Moscow's MICEX stock exchange index had fallen by 2.38 percent, and the dollar-denominated RTS index was down by 3.83 percent.
The Russian ruble also plunged in value against leading currencies.
The dollar climbed to 34.88 rubles and the euro rose to 47.17 rubles in intraday trades.
Shares in two energy giants targeted by the sanctions also took a pummelling, with state-owned oil giant Rosneft's shares down 4.49 percent and private firm Novatek's stocks tumbling 5.15 percent in late trading.
- 'Boomerang effect' -
Rosneft chairman Igor Sechin said the company was not involved in the Ukraine crisis and argued that targeting it would simply hurt ordinary Russians.
"It's not Rosneft that is the target, but Russia's sovereign independent policy," Sechin said, calling the sanctions "an attempt to worsen the economic situation for our citizens."
Sechin was personally targeted by US sanctions in April as someone who has "shown utter loyalty to Vladimir Putin," the Russian president.
Putin meanwhile warned that the latest measures would have a "boomerang effect" on US strategic interests and its population.
Rosneft for example has multi-billion dollar plans to develop the Arctic shelf with US oil giant ExxonMobil.
"We are giving America's largest company a chance to work on the (Arctic) shelf," Putin said, apparently referring to ExxonMobil. "Does the US not want it to work there?"
Key Russian companies in the defence and energy sectors, including Gazprombank and state-owned Vneshekonombank are now barred from long-term borrowing on US capital markets.
Many depend on foreign financing for development projects, such as Rosneft's new Siberian oil fields or Novatek's plans to build a liquid natural gas (LNG) plant on the northern Yamal peninsula.
US officials have said the new sanctions do not affect existing American interests or block limited transactions but this might change if Russia does not take steps to de-escalate the crisis.
"Today's measures were, for the first time, taken against some of Russia's largest companies - and therefore will have some systemic effect," said Cliff Kupchan of political risk consultancy Eurasia Group.
However the Kremlin is not likely to change course over Ukraine just yet, he said. "Putin will absorb a lot of economic pain before he considers a course correction."
- No 'united front' against Moscow -
Investors should now focus on whether the EU will follow with similar broader sanctions, Alfa Bank said in a research note.
EU leaders agreed Wednesday to suspend investment in Russia by the European Investment Bank and the European Bank of Reconstruction and Development.
That fell far short of Washington's measures, however.
"The United States did not achieve a united front by the West against Russia, which it was hoping for," said Maria Lipman, an independent political analyst.
While Washington was able to impose sanctions against important military and financial institutions, the EU was more moderate, and Moscow will use these contradictions in the future, she said.
Russia nevertheless faces the prospect of more expensive loans and increased reliance on Chinese money, Lipman said.
"China will be happy to use this for their benefit," she remarked.
Russian Technologies, the umbrella state corporation that controls some entities targeted by the US, warned that sanctions would undermine US-Russian cooperation that "took years to develop."
Another target of measures is the arms company Kalashinkov Concern, maker of the famous AK-47 assault rifle, of which the US is a major importer.
"The United States is an important market," Kalashnikov Concern said Thursday, with demand so strong that there are three years worth of pre-orders at present.
"Sanctions go against American consumers," it concluded.