"How to punish Russia" is the question of the day. All sorts of measures are being considered, including kicking Russia out of the G-20, trade sanctions, even travel restrictions for some Russian government officials.

But in the end, as Jason Karaian poin ts out in Quartz, it is the free market that is doing enormous damage to Putin's Russia:

Strongly worded statements, threats of travel restrictions, and summit no-shows. So far, these are the relatively mild diplomatic implications for Russia of its incursion into Ukraine, as few in the West can stomach an open military confrontation with Moscow over its apparent occupation of Crimea.

But the markets are punishing Russia much more swiftly than the diplomats. A wide range of Russian assets—stocks, bonds, and the ruble—plunged in value today. To shore up the ruble, which is plumbing record depths, Russia’s central bank unexpectedly hiked interest rates today. It ratcheted up the benchmark one-week rate from 5.5% to 7%, and traders report that the central bank has also been spending billions of dollars in currency markets to stem the fall in the value of the ruble.

The two main Moscow stock markets, the Micex and the RTS, have fallen by more than 10% at the time of writing, in a broad-based selloff. Big Russian companies like Gazprom and Sberbank saw their share prices plunge as traders dumped their shares.

For its part, Gazprom said today that it would reconsider the gas price discount it extended to Ukraine only a few months ago. Of course, Russia has not hesitated to punish Ukraine by restricting its energy supply in the past, with reverberations felt throughout Western Europe. These trade links—Western Europe gets about a quarter of its natural gas from Gazprom—make strict economic sanctions against Russia, like the ones imposed by the West on Iran or Syria, impractical. After all, the international opprobrium that met Russia’s invasion of Georgia in 2008 was never backed with serious action.

As we have written before, Putin takes great pleasure in ”delivering a bloody nose” to his perceived enemies, even when it risks harming his standing on the international stage. Indeed, after speaking with Putin yesterday, German chancellor Angela Merkel reportedly told US president Barack Obama that the Russian leader seemed out of touch with reality—”in another world.”

CBS is reporting that the Russian stock exchange lost about 10% of its value in one day while the ruble fell below 50 to the euro for the first time. Russian investors are extremely nervous about this little adventure and are voting with their pocketbooks.

The market action suggests that Putin will try to try to end the crisis as soon as poissible. Getting battered like this, the Russian economy could plunge into a recession if it goes on much longer.