Dealings on Russia's foreign exchange markets had to be suspended at one stage under local circuit-breaker provisions. It was the currency's biggest one-day fall for four years.
The deal announced last night will involve the swapping of holdings in one and two-year GKO and OFZ bills for three, four and five-year rouble- denominated bonds. The three-year bonds will carry a coupon of 30 per cent, with the coupon on the longer-dated bonds falling by 5 per cent a year from then on.
Investors will also be offered 2006 dollar-denominated bonds with a 5 per cent coupon. Those taking rouble bonds are to be offered a cash kicker worth 5 per cent of their holding.
Western bankers welcomed the fact that on a key point of principle - that foreigners should receive equal treatment with Russian nationals - Moscow has caved in to foreign pressure. However, there was concern at restrictions imposed to prevent the bonds being dumped on the open market for dollars once the debt swap is completed next week.
Traders said local banks were taking advantage of the attempts by the central bank to pump in liquidity to dump the currency wholesale in favour of dollars.
"It is getting more crazy. It is getting out of control," said David Riley at Fitch IBCA, the debt rating agency. "The idea was to have an orderly devaluation. But this is nothing of the sort."
In the midst of the crisis, three of Russia's largest banks - Menatep, Uneximbank and Most Bank - yesterday revealed that they were to merge.
The deal is likely to be followed by others as Russia's poorly capitalised banking system struggles to cope with the aftermath of last week's devaluation. Estimates suggested that the amount owed by Russian private sector banks to foreign counterparties could be as high as $38bn, if off-balance sheet deals are taken into account.
Russia's central bank chief, Sergei Dubinin, seemed increasingly caught between his desire to maintain monetary discipline and his fear that unless further liquidity was pumped into the system, some of the larger banks would go to the wall and with them bring down what is left of Russia's shaky financial system.