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Russian rate hike fails to halt ruble's fall

Emergency measures by the Russian central bank Monday night, aimed at limiting the ruble's devaluation, looked to have fallen short within hours of their announcement, with the ruble tumbling against the dollar as traders continued to dump the Russian currency Tuesday.

The Central Bank of Russia (CBR) unexpectedly hiked rates by 650 basis points in a midnight session on Monday evening. It raised its base rate to 17 percent from 10.5 percent after the ruble suffered its worst trading day for 15 years. The currency rebounded at the open on Tuesday, appreciating 9 percent against the dollar. However, the ruble soon trimmed its gains and was down for the session against the greenback by late afternoon London time.

The ruble, already one of the worst-performing currencies of 2014, reached a high of 65.9060 against the U.S. dollar before the late night emergency move, but hit 71.84 by 4pm London time on Tuesday after reaching a low of around 59.7839 at the session open. It also hit a new record low against the euro on Tuesday morning.

Later Tuesday, CBR First Deputy Governor Sergei Shvetsov told news agencies Tuesday that the situation in the foreign exchange and equity markets was "critical" and that the bank will implement more measures to stabilize domestic markets.

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"The CBR action is failing... no one is positioned for this. This will impart huge short term damage to Russia - there is now a huge credibility gap for Russian policy makers in the eyes of the market," Timothy Ash, head of emerging markets research at Standard Bank, wrote in a research note.

"(It's) the most incredible currency collapse I think I have ever seen in the 17 years in the market...it has only to be a matter of time before the rating agencies respond with ratings downgrades, likely to junk status."

Read MoreRussian central bank will take more measures after rate hike: First deputy

Western sanctions and the drop in oil are seen as the main reasons behind the currency crisis now facing Russia. The country is expected to fall into recession next year. Oil continued its dramatic fall in price on Tuesday with Brent futures falling below the $60 a barrel level for the first time since 2009.

Russia's central bank cannot allow this move to fail, according to Ash, and will now have to come back with more rate hikes or a "big, big" foreign exchange intervention, where the bank sells large sums of dollars to try to stem the U.S. currency's rise in value against its own currency. However, these foreign reserves have become strategic assets due to strained geopolitics fro Russia, according to Ash, with analysts stating that they would only be sold as a last resort.

Read MoreRussia raises key rate to 17%, effective Tuesday

Max King, a portfolio manager at Investec Asset Management, believes that such a high best rate for Russia was never going to look sustainable or credible and says that traders are fast losing confidence in the bank's ability to stem the falls. Nonetheless, he said that the ruble was "substantially overshot" at this level.

"Anybody that sells it here is at risk of a major bounce back in the short term," he told CNBC Tuesday.

Currencies in Eastern Europe also saw weakness with the selling pressure from the ruble spreading to other nations. The dollar appreciated sharply against the Hungarian forint and the Georgian lari in morning trade. In stock markets, the Russian MICEX was up 0.89 percent by late afternoon.

The CBR and its governor, Elvira Nabiullina, remained vocal on Tuesday morning as officials watched the Russian currency wall back near record lows. Nabiullina spoke on Russian TV saying that the ruble was fundamentally undervalued and would take time to rebalance, according to Reuters. She added that the fall was a signal for the economy to adapt to new conditions, according to the news agency. The bank also announced it was offering more foreign currency liquidity to Russian banks.

Benoit Anne, the head of emerging market strategy at Société Générale, believes that the ruble's depreciation didn't signal failure for the CBR just yet and urged the bank to follow through with tough language and heavy-handed foreign exchange interventions.

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"I am not totally surprised that the (ruble) is struggling after this bazooka policy signal. After all, the CBR's track record in terms of containing the currency crisis had not been particularly impressive over the past few weeks, to say the least," he said in a research note on Tuesday.

"The CBR needs to be consistent and keep the pressure. If they do, what happened last night may well be seen as a true game changer in the (ruble) market."

Standard Bank's Tim Ash questioned whether the CBR is truly independent from lawmakers at the top of the Kremlin and believes that the late-night session likely reflected the need for the banking officials to get agreement for a radical move from their political masters.

"They likely pleaded that their hands were being tied behind their backs and needed flexibility to act as the policy was not working and risked the very stability of the financial sector," he said.