Ksenia Galouchko, Halia Pavliva and Ye Xie Moscow and New York

Vladimir Putin’s territorial ambitions are bumping up against financial markets.

As the Russian president plots his next move on Ukraine, investors are giving his inner circle pause for thought.

Since Putin annexed Crimea in March in the teeth of international outrage, Russian stocks have become the most volatile since 2009. Swings in the rouble against the euro are now the most extreme on record, while expectations for fluctuations in the currency against its emerging market peers are at their highest point in two years.

That is making investors more reluctant to gamble on a country that is already close to a recession and dependent on natural resources to lead economic growth.

While Putin is motivated more by the desire to assert his nation’s power in the world, invading eastern Ukraine would have provoked harsher international sanctions and risked accelerating the flow of money out of Russia.

“We got to the point where the market speaks and politicians are forced to listen and adjust,” Mansur Mammadov, a money manager at Kazimir Partners in Moscow, said.

“The volatility was like a tsunami and it would be just logical to assume that it made the politicians realise the cost of Russian expansion in Ukraine was too much for the slowing economy.”

A gauge of price swings in Russian stocks jumped to a more than four-year high compared with shares of other developing nations. Historical volatility for the benchmark Micex index in Moscow reached 29.7 percent on Friday, almost three times the level of the MSCI emerging markets index and up from 12.7 percent at the end of February.

Moves in the rouble were amplified after the US and EU imposed sanctions on Putin allies in Russia and Ukraine. The currency’s three-month historical volatility rose to 11.3 percent from 7 percent at the end of last year. That compares with 4.4 percent for the euro as the gap between the two gauges reached 6.92 percentage points on Friday, the widest since Europe’s common currency was introduced in 1999.

A gauge of expected swings in the currency against the dollar was at the highest since October 2012 on April 25 compared with developing country currencies such as the Turkish lira and the Chinese yuan.

The increased volatility threatens to intensify the slide in the economy.

Russia faced stagnation this year, Herman Gref, Sberbank’s chief executive and a former economy minister, said at the St Petersburg International Economic Forum on May 22.

The probability of a recession in the next 12 months is 50 percent, according to a survey of 15 economists by Bloomberg.

Gross domestic product grew 0.9 percent in the first quarter from the same period of last year, the slowest pace in a year, the Federal State Statistics Service said last month.

Fixed capital investment slumped for a fourth month in April while inflation jumped to an 11-month high of 7.3 percent as the rouble’s slide drove up the cost of imports.

The country posted capital outflows of about $55 billion (R5815bn) in the first four months of the year, approaching the $63bn lost in all of 2013, according to central bank chairwoman Elvira Nabiullina.

With the economy reeling and the threat of further sanctions looming, Putin toned down the rhetoric in the immediate aftermath of Petro Poroshenko’s victory in Ukraine’s May 25 presidential election. Russia said it respected the outcome and was ready to negotiate with the new leader. – Bloomberg