Nov. 11 (Bloomberg) -- Russia's ruble fell the most in two months as the central bank loosened its defense of the currency amid the country's worst financial crisis since the 1998 devaluation.

Bank Rossii widened its range on the ruble against a basket of dollars and euros by 30 kopeks (1 cent) to increase the currency's ``flexibility'' and lifted its benchmark refinancing rate to 12 percent from 11 percent to arrest outflows, according to separate statements after the stock market closed. The Micex Index plunged 13 percent, the biggest decline worldwide, and won't open tomorrow, spokeswoman Anna Cheryomushkina said.

``They're going to move the line in the sand back a little bit, where they hope they can defend it,'' while resisting a formal devaluation that would erode confidence in ruble deposits, Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow, said in an interview today. ``If people start to lose confidence in the banking system, we could have a massive run on the banks as we saw twice in the nineties, and then the game is up.''

Russia drained 19 percent of its currency reserves to stem a 17 percent slide in the ruble against the dollar since the start of August, prompting warnings of possible downgrades from Fitch Ratings and Standard & Poor's. Financial turmoil has forced the country's largest oil and steel producers to seek tax breaks, while the defense industry is failing to meet government orders.

Government Support

The central bank is raising rates, at a time when the U.S., Europe, China and India are cutting to help unlock credit markets, after a 1 percent slide in the ruble against the euro- dollar basket today. Investors sold the Russian currency after central bank Chairman Sergey Ignatiev said the ruble has a ``tendency toward weakening,'' during a televised press conference yesterday.

Russia, the world's second-largest oil producer, is suffering among the worst losses in financial markets as the global economic slowdown crimps demand for its exports. Russian stocks fell 65 percent this year, compared with a 42 percent slide in the MSCI World Index of developed nations.

Crude dropped as much as 6.6 percent in New York today, extending its decline to 60 percent from a July record, on speculation the International Energy Agency may lower its 2009 oil-demand forecast. Urals crude, Russia's main export blend of oil, has slumped 61 percent to $54.70.

If oil falls below a ``psychologically important'' $50 a barrel, pressure will increase on the ruble, Weafer said.

Bank Rossii manages the ruble to limit the effect of fluctuations on the competitiveness of Russian exports.

``This has put fear into the market,'' said Lars Christensen, head of emerging-market research at Danske Bank A/S in Copenhagen. ``It may lead to domestic Russian players leaving the ruble, triggering panic-selling.''

Flight to Dollars

In 1998, the ruble dropped 71 percent against the dollar as the government defaulted on $40 billion of debt, causing the banking system to implode as Russians pulled out their savings and fled to the safety of the dollar. Hedge fund Long-Term Capital Management LP collapsed after losing about $4 billion, triggering a slump in world markets. The economy shrank 6.5 percent and inflation accelerated to 84 percent.

Today's central bank decision will prompt ``further runs on deposits,'' Alfa Bank analysts led by chief economist Natalia Orlova wrote in a research note today. ``Flight from rubles now is the key factor to watch.''

Tax Breaks

Troika Dialog, Russia's oldest investment bank, said last week the decline in oil may drive the ruble as much as 30 percent lower against the basket.

Igor Yurgens, head of the Institute of Contemporary Development, which advises President Dmitry Medvedev, told Ekho Moskvy radio station today that the government won't allow a ``significant'' depreciation. Bank Rossii's Ignatiev and Medvedev's economic adviser, Arkady Dvorkovich, have both said there will be no ``sharp devaluation'' of the ruble.

OAO Severstal and Evraz Group SA led five steelmakers pushing for government support including tax breaks, Vedomosti reported last month. Oil companies are also discussing tax breaks with the government, Interfax reported today, citing Energy Minister Sergei Shmatko. Deputy Prime Minister Sergei Ivanov said on state TV that defense companies are facing difficulties in meeting orders from the government because of the global credit crunch.

OAO Magnitogorsk Iron & Steel said it cut fourth-quarter spending by 40 percent. The MSCI Emerging Markets Index fell for the first time in three days, slumping 4.9 percent to a two-week low of 554.60 at 2:16 p.m. in New York. The benchmark has lost 55 percent of its value this year.

Deficit

Goldman Sachs Group Inc. economist Rory MacFarquhar in Moscow warned today that Russia faces a current account deficit. ``The question is now not whether the ruble needs to weaken, that much is obvious to everyone, but by how much,'' he said.

The country had a current-account surplus of $91.2 billion in the first nine months of this year. Russia's $484.6 billion of international reserves are 25 times bigger today than they were on the eve of the default. They are the world's third- largest, after China's $1.9 trillion and Japan's $955 billion.

-- With reporting by Ken Prewitt in New York. Editor: Gavin Serkin, Paul Armstrong

To contact the reporter on this story: Laura Cochrane in London at lcochrane3@bloomberg.netEmma O'Brien in Moscow at eobrien6@bloomberg.net

Last Updated: November 11, 2008 14:19 EST