By Marc Jones

LONDON (Reuters – After Vladimir Putin increased the stakes in a crisis West fearing could spark a war, investors were anticipating a rough day for the Russian and Ukrainian markets.

The Russian president recognized the independence of two eastern Ukrainian regions, Donetsk (in east Ukraine) and Luhansk (in western Ukraine), in a long televised speech.

Already this year, tensions rattled the global markets and took tens billions off the assets of Russia and Ukraine. But Monday’s escalated situation is likely to make matters worse.

Viktor Szabo (a portfolio manager in emerging markets at abrdn, London) stated that “It will probably be an understatement [to say] it will turn ugly day (on market(s) tomorrow.”

“I was hoping that we wouldn’t be able to get here but this is a big step!”

Russian markets still had access to Putin’s announcement of his decision, which he made live via television after making phone calls to France and Germany leaders.

Moscow’s stock exchanges plunged to the lowest levels in more than a year. Moscow’s dollar-denominated RTS and MOEX Russian index ended the day 13.2% below, respectively.

Before Tuesday’s Asian Open, analysts at Commonwealth Bank of Australia (OTC) advised traders that Putin’s move to recognize the areas of Ukraine held by separatists would only exacerbate tensions already high. 

They said that financial market participants are now waiting for an answer from Europe and the United States.

It is likely that this response will take the form new and tough sanctions.

While there may be other options, the best and most serious measures are to disconnect Russia’s banks from SWIFT and ban all US investment funds that hold Russian bonds.

Foreigners owned just more than $43 trillion worth of OFZs as Russia’s bonds in rouble were known at the end of 2011.

“We agreed (Britain) and (the EU) will coordinate to deliver swift sanctions against Putin’s regime, and stand shoulder-to-shoulder with Ukraine,” British Foreign Minister Liz Truss said on Twitter (NYSE:) following a call with European Union foreign policy chief Josep Borrell.

GRAPHIC: Russia Ukraine CDS – https://fingfx.thomsonreuters.com/gfx/mkt/klvykmxlqvg/Pasted%20image%201645485094587.png

SLUMMING FUTURES

The yields of Russia’s 10-year OFZs will rise more after hitting an all-time high of 10.6% last Monday. Russia’s international FX reserves are the most extensive in the world, with $630 billion. But the cost of protecting its sovereign debt from default has risen to the highest point since the beginning of 2016.

Analysts warned about the potential impact on confidence in the global markets, as well as the increasing pressures from global borrowing costs, this year.

Futures markets pointed to a 1.8% drop in the Wall Street on Wall Street, 2.2% fall on the Nasdaq, 2.5% on the Nasdaq, and 3.7% slump on Europe. U.S. Treasuries also rallied due to increased demand for safe traditional assets.

Manik Narain of UBS, Head of Emerging Market Strategy said that this step increases uncertainty and creates additional downside risk for global assets.

Ken Polcari from Kace Capital Advisors Florida, said that there would be a “negative reaction”. “We are going to test the Jan. 24 lows which was 4,220 on the S&P 500”.

GRAPHIC: Russia’s currency reserves – https://fingfx.thomsonreuters.com/gfx/mkt/lgpdwxzkxvo/Pasted%20image%201644935695631.png