After Vladimir Putin seized Crimea and fomented a rebellion in eastern Ukraine, Western nations slapped sanctions on Russia in an attempt to curtail Putin’s new expansionist ambitions. The strategy aimed at separating Putin from his oligarchical allies and pressure him into retreat, or collapse Russia’s economy and render it incapable of aggression. Nearly a year later, we may be about to see whether it works. The Russian ruble has collapsed, and the shock waves may destabilize Putin’s power base:

The Russian ruble faced intense selling pressure Tuesday, falling at one stage by a whopping 20 percent to historic lows despite a massive pre-dawn interest rate hike from the country’s central bank.

The surprise decision to raise the rate to 17 percent from 10.5 percent came in the middle of the night and represented a desperate attempt to prop up the troubled currency. The ruble has fallen sharply in recent weeks as a result of sliding oil prices as well as the impact of Western sanctions imposed over Russia’s involvement in Ukraine. …

The ruble traded at 72 per dollar late Tuesday afternoon. That’s a modest improvement on where it was earlier — it hit 78.5 to the dollar — but still means the currency is more than 60 percent down from where it was in January.

The Russian central bank tried to stop the bleeding by hiking its interest rate from 10.5 to 17, but as Bloomberg noted above, it didnt work. Its the latest attempt by the Bank of Russia to shore up the ruble since sanctions started to bite in the spring, and the price tag for those interventions amount to $90 billion so far. That’s a lot of money to pay for failure:

Russia’s central bank can continue buying more rubles with its foreign reserves in order to support the currency.

“I think we’ll see some foreign exchange intervention at some point from the central bank, but it needs to time this well to avoid throwing reserves down the drain,” said Uglow.

According to the latest data, the central bank has burned through nearly $90 billion this year trying to defend the ruble. The impact of its interventions have been short lived.

“Spending reserves won’t do much if the market is convinced [central bank] resolve is weakening,” said Craig Botham, an emerging markets economist at Schroders. “Political willingness to see reserve capital disappearing into the pockets of foreigners will wane over time.”

The danger of the ruble collapse isn’t limited to Russia, which will have investors scrambling to divest any assets with risk of Russian contagion:

The problem for the central bank is that it is swimming against powerful forces. The economic outlook is awful given Russia’s dependence on oil and there is no sign of détente with the West over Ukraine. The central bank warned this week that with oil at $60 a barrel, the economy could contract by 4.5%-4.7% in 2015. The drought of Western investment in Russia threatens the longer-term picture.

In response to a continued decline in the ruble, the central bank could increase rates further—increasingly crushing the outlook for growth—or it could intervene in the market. But the danger in doing so is that it would simply deplete its reserves without obtaining more than temporary relief.

More broadly, Russia’s woes pose a bigger threat than this year’s other bouts of emerging-market turbulence. Russia carries a hefty weight in emerging-market bond indexes and it has important economic links with Europe. Already, investors have reported so-called “portfolio contagion”—selling assets that are performing well because liquidity for securities that are falling in price is limited. That will create opportunities, in time. But initially it threatens to spread the damage.

Russia is waving a big red flag for investors.

The West wanted to make Russia toxic. It took a while, but the sanctions and the obviously-intentional oil glut has finally pushed Putin to that point. The question now will be whether Russia’s oligarchs want to watch their wealth melt away, or would rather look for another autocrat with less toxic ambitions to take Putin’s place.