The ruble hit a five-month low against the dollar on Thursday while Russian financial stocks plunged on fears of the West unleashing new sanctions over claims that the Kremlin had ordered troops into Ukraine.
The fading power of Russian consumers and eroding confidence of investors who could kick-start stalling growth underscored the political risks facing President Vladimir Putin in his escalating faceoff with the West over the future of the strategic ex-Soviet country.
But the economic pain being suffered by Ukraine has been even more brutal. Fears of an actual war with Russia sent its currency trading around an historic low of 13.60 hryvnias against the dollar -- a loss of 40 percent since the start of the year.
The Russian ruble shed 1.5 percent on Thursday and closed at 36.75 to the greenback. The currency had only been weaker in the post-Soviet era when Kremlin-backed troops seized Ukraine's Crimea peninsula in March.
The dollar-denominated RTS index was down 3.3 percent while its ruble counterpart MICEX had lost more than 1.5 percent on a day that dealt particularly heavy damage to Russia's most important banks.
The country's largest lender Sberbank was off more than four percent while its smaller state counterpart VTB -- also the target of US and European sanctions -- lost around 3.5 percent on fears that claims by the West and Kiev of a Russian invasion of eastern Ukraine would lead to new punitive steps against Moscow.
"The financial sector is bearing the biggest risks," Moscow's Nord Capital investment house wrote in a market report.
The Russian and Ukrainian markets fell on Thursday as rapidly as the security anxieties across Europe mounted.
Ukraine's ambassador to the European Union called for "large-scale" military assistance from Brussels as both Kiev and Washington claimed that Russian troops had helped pro-Kremlin insurgents open a new front in the southeast of Ukraine.
"It is becoming increasingly clear that Russia wants more than Crimea and autonomy for eastern Ukraine," Germany's Berenberg Bank economist Christian Schulz warned.
Russia's ambassador to the Organisation for Security and Cooperation in Europe (OSCE) told counterparts in Vienna that "no Russian soldiers" were stationed in Ukraine. But both the Kremlin and the foreign ministry had issued no formal comment by the evening.
- Dwindling oil windfall -
Switzerland followed the United States and European Union's lead on Wednesday by barring top Russian banks from issuing cheap long-term loans that would provide them with the funds needed to help domestic consumers borrow for big purchases such as cars and homes.
"While far from triggering a full-blown balance of payment crisis, tighter access to Western capital markets will take its toll on the economy, propagating through financial and confidence channels," VTB Capital said in its latest monthly economic update.
The Moscow investment bank also raised its annual inflation outlook to eight percent -- nearly one percentage point above the government's latest upwardly-revised forecast -- due to Russia's decision to strike back at earlier economic reprisals by banning most US and European food.
It added that expectation of further consumer price gains would force the central bank to damage Russia's short-term economic revival prospects by opting to "retain its tightening bias and keep rates higher for longer".
The economy ministry this week abandoned plans to raise its 2014 growth outlook to a still-meagre 1.0 percent and kept its earlier 0.5 percent forecast.
But some analysts noted that the broader problem for the energy-export dependent economy and Putin was that Russia was mortgaging its future by being forced to dip into the huge profits it had made during last decade's oil price explosion.
"Stepping back, the big picture is that having saved much of its windfall during the early part of last decade's boom in oil prices, Russia's government has more recently started to spend it," London's Capital Economics consultancy observed.