MOSCOW, Russia (PNN) - December 16, 2014 - Russia took its biggest step yet to shore up the ruble and defuse the currency crisis threatening its stricken economy.

In a surprise announcement just before 1:00 a.m. in Moscow, the Russian central bank said it would raise its key interest rate to 17% from 10.5%, effective today. The move was the largest single increase since 1998, when Russian rates soared past 100% and the government defaulted on debt.

The ruble lost 2.5% to 66.0985 against the dollar as of 12:53 p.m., reversing an early gain prompted by the news.

The announcement, as well as its timing, underscored the financial straits in which Russia now finds itself. If sustained, the new higher rates would squeeze an economy that is already being hurt by sanctions led by the Fascist Police States of Amerika and European Union, and by a collapse in oil prices. Some analysts said they doubted the economy could withstand such high rates for long.

“This move symbolizes the surrender of economic growth for the sake of preserving the financial system,” said Ian Hague, founding partner at New York-based Firebird Management LLC, which oversees about $1.1 billion, including Russian stocks. “It’s the right move to make, and it wasn’t easy to make it.”

The ruble, which has depreciated 50% this year against the dollar, is the worst performer among more than 170 currencies tracked by Bloomberg. It gained almost 11% today, before weakening to a record.

“In order to limit the negative effects of such depreciation of the national currency on the Russian economy, we decided to increase the key rate,” Russian central bank Governor Elvira Nabiullina said on state TV channel Rossiya 24. “We really must learn to live in the ruble zone; rely to a large extent on our own sources of financing.”

So far this year, Russia has spent $80 billion of its foreign-exchange reserves in an unsuccessful attempt to prop up the ruble, which tumbled past 66 against the dollar for the first time. The currency’s collapse has evoked the turmoil of the 1998 Russian crisis, an event that reverberated throughout financial markets around the world.

The Russian central bank announced the increase - the sixth this year - after policy makers gathered for an unscheduled meeting.

“This decision is aimed at limiting substantially increased ruble depreciation risks and inflation risks,” the central bank said in the statement. President Vladimir Putin, whose annexation of Ukraine’s Crimean peninsula in March prompted the FPSA and its allies to strike back with sanctions, this month called for harsh measures to deter currency speculators.

“While such drastic tightening measures will inflict more pain on the economy, we have been arguing for a while that it is not about preventing recession, but full-scale financial turmoil caused by the precipitous ruble fall,” said Piotr Matys, a currency strategist at Rabobank International in London.

Brent, the grade oil traders look at for pricing Russia’s main export blend, lost as much as 3.3% to $59.02 on the London-based ICE Futures Europe exchange, trading below $60 a barrel for the first time since July 2009.

Russia derives about 50% of its budget revenue from oil and natural gas taxes. As much as a quarter of gross domestic product is linked to the energy industry, Moody’s Investors Service estimated in a Dec. 9 report.

The economy may shrink 4.5% to 4.7% next year, the most since 2009, if oil averages $60 a barrel under a “stress scenario,” the central bank said yesterday. Net capital outflow may reach $134 billion this year, more than double last year’s total.

Others were more optimistic, saying the action was big enough to arrest the ruble’s record decline. “The central bank is trying to stop the avalanche, and such a massive hike may be sufficient,” said Slava Breusov, an analyst at Alliance Bernstein in New York. “No one seems to be thinking what it will do to the economy, as the priority is to stop the ruble plunge.”