File picture: Alex Grimm

London - Russian stocks plunged 5 percent on Friday and debt insurance costs hit their highest in nearly two years, denting emerging markets across the board, on nervousness about the impact of likely Western sanctions on Russia.

US Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov will meet in London on Friday, in an attempt to make diplomatic headway before a referendum on Sunday on Ukraine's Crimea region joining Russia, which the West says is illegal.

The Russia/Ukraine stand-off was hitting general sentiment towards emerging markets.

“Investors are on the back foot,” said Thu Lan Nguyen, emerging FX strategist at Commerzbank in Frankfurt.

“There's no panic, but there is a lot of uncertainty.”

The MSCI emerging equities index fell 1 percent to five-week lows and was on course for a weekly loss of 3.5 percent, its worst weekly performance since June 2013.

Russian stocks fell 5 percent to their lowest since 2009 and five-year credit default swaps rose 18 basis points to 285 bps, their highest since June 2012, according to Markit.

Offshore rouble contracts have been attracting a premium, as investors grow nervous about the functioning of Russian markets.

“Sanctions could mean lower growth in Russia, due to more expensive and less easily available finance, and a growing role for the state in the economy, while heightened security tension could impact global growth,” said analysts at Morgan Stanley in a client note.

Some analysts say sanctions could push Russia's already slowing economy into recession.

Ukrainian dollar bonds fell by up to a point but were off recent record lows, and the hryvnia weakened.

The Polish zloty approached six-week lows against the euro.

The Turkish lira inched lower within recent ranges, following civil unrest this week ahead of local elections. - Reuters