The Russian economy has recovered from the downturn of spring 2022. Russia’s gross domestic product (GDP) grew by 4.8% on the year in April-June, the central bank said late on August 1. In January–March, the economy contracted by 1.8%. The July–September GDP growth is expected at 3.6% and the October–December at 1.5%.

The latest forecasts point to recovery of GDP this year. The IMF’s forecast now sees GDP growth of 1.5% this year, while the Bank of Russia forecast expects growth in the range of 1.5−2.5%. The July forecast average published by Consensus Economics puts growth this year at around half a%.

After several consecutive months of recovery, growth in seasonally adjusted industrial output yet stalled in June. The situation was about the same in both mining & quarrying and manufacturing. Mining & quarrying output has increased slowly since the start of the year, while manufacturing output has grown considerably. Manufacturing output in May-June was up by about 8% from the same period two years ago.

The rise in manufacturing has been driven by those industrial branches that benefit from higher military spending such as metal products, electronics, electrical machinery & equipment, and manufacture of vehicles other than automobiles. During the first six months of this year almost three quarters of the over 6% y/y growth in manufacturing came from these four branches.

Growth in construction activity plateaued in June, but construction was still up 10% y/y thanks to steady growth for over a year. The on-year volume of goods transport fell due to decreased pipeline transmission of oil & gas. Rail transport increased only slightly. In contrast, growth in road transport remained rapid as in 2022. Passenger ridership on public transport, which already grew last year, was up further this year for both bus and especially rail transport.

The recovery in private consumption from the spring 2022 slump has continued. In the second quarter of this year, household spending on purchases of goods and services, as well as retail sales, were up 9−10% y/y in real terms from last year’s downturn and roughly at the same level as in spring 2021. Real household incomes continued to rise and were up a few% from two years earlier. The rise in real wages accelerated.

Russia’s economy is likely to have had a very strong second quarter as industrial production and retail sales rose sharply in the second quarter (both by more than 3.0% q/q). But the activity data for June suggest that a lot of the momentum in industry started to fade towards the end of the quarter and Capital Economics thinks that growth is likely to slow sharply in the second half of the year.

The threat of a recession in Russia is growing. The economic statistic that Putin loves to cite is GDP growth. The economy last year contracted 2.1%, but it grew 4.6% in the second quarter of this year. “Sure, for a few months in the middle of last year, things were very difficult. But ever since the third quarter [of 2022] Russia has seen economic growth,” Putin boasted earlier this week.

But this rapid growth is down to two things — public spending (mostly on the military) and a dovish monetary policy. However, as the Russian currency tumbles, the Central Bank has turned more hawkish and is again raising interest rates. Following a dramatic slump in the ruble last week, it hiked the rate by 350 basis points, taking it to 12%. That helped Russia’s currency, but it has significantly increased the danger of Russia entering a recession in the coming months — from 6 to 21%, according to calculations by Bloomberg.

Bloomberg assessed the likelihood of a recession on the basis of the difference between the yields of five-year and three-month government bonds. The sudden rate hike flattened the yield curve but also reduced the spread between these securities’ yields. And this indicates a greater risk of recession, according to Bloomberg.

Interest rates on short-term borrowing remain lower than 12%, which suggests that the market expects a rate cut in the next three months, Bloomberg reported. However, if expectations start to turn toward the 12% rate remaining in place for longer, the likelihood of recession in the next six months could double to around 40%.

Experts at the centre for Macroeconomic Analysis and Short-term Forecasting have also written about the threat of recession. “The weakening ruble (and rising prices for imports) plus the hike in the Central Bank’s base rate could reverse the emerging upward trend,” they warned in a report published last month.

Analysts worry that a bubble is forming in the real estate market. The strong growth is helped by the government’s policy to subsidise mortgages as a way to stimulate the economy, but tehre are signs this policy has been taken too far.

The potential challenges lurking within the mortgage market continue to be a topic of fervent discussion. Over the past years, the government's discounted mortgage initiative, in direct opposition to the Central Bank's stance, has contributed to inflaming the real estate sector. The allure of securing a mortgage at a reduced rate, occasionally even below the base rate, spurs individuals towards property acquisition. Consequently, this robust demand outpaces supply, leading to an upsurge in real estate prices, which saw an average increase of 21% across Russia last year. In a move to sustain this momentum, Putin extended the program until July 2024, albeit with a bumped-up discounted rate of 8% from the previous 7%.

Tatiana Orlova, an economist at Oxford Economics cautioned, "Subsidized mortgages fuel an explosive expansion in the construction sector. However, at a certain juncture, the pace of mortgage growth is bound to decelerate, potentially leaving the construction industry saddled with an oversupply of unsold apartments." The intricate dynamics of the mortgage market, coupled with the broader real estate landscape, warrant a closer examination as Russia navigates these evolving economic challenges.

The big event of the month was the ruble’s crash through RUB100 to the dollar . In August, the ruble's exchange rate has been at its weakest since spring 2022. Compared to August of last year, the exchange rate of the ruble has been about 40% weaker.

In order to curb the inflationary pressures caused by the sharp weakening of the ruble and domestic supply constraints, the Central Bank of Russia raised its key interest rate by 3.5 percentage points in the extra 15.8. in its held meeting. The interest rate is now 12%. According to media reports, there have also been discussions in Russia about reintroducing restrictions on various capital movements.

The ruble's weakening is mainly due to the melting of Russia's exceptionally large current account surplus last year. According to the Russian central bank's preliminary estimate, the current account surplus was only $25bn in January-July, or 85% lower compared to last year's peak figures.

It took a few days but the ruble rallied and was trading at RUB94 to the dollar by August 18. The currency was help after the financial elite met with leading Russian corporate and encouraged them to exchange dollars that acted as an informal intervention and rallied the ruble.

The authorities had been contemplating introduce formal capital controls and reintroducing the mandatory 80-90% foreign exchange surrender requirement, but as is often the case, Nabiullina and Russian Finance Minister Anton Siluanov found a temporary solution that did the trick without resorting to CBR interventions on the exchange markets and so burn up precious international reserves.

Ukraine’s counteroffensive has entered a new phase. The Armed Forces of Ukraine (AFU) has made progress and broken through Russia’s first defensive line in the southern regions in an attempt to reach the beaches of the Sea of Azov.

This followed a secret meeting on the Polish border between Nato military leaders and Ukraine’s high command where it appears that Nato recommended Kyiv stop all its other smaller operations and concentrate its forces in the south.

It remains to be seen if these tactics work but Bankova needs to produce some results. The new tactics are fuelling very high casualty rates where US intelligence estimates that 70,000 Ukrainians have been killed in action and another 100,000 injured – that is 8% of the entire half a million strong of the fighting force and 32% of the same for the combined dead and injured. Ukraine cannot main those levels for long.

At the same time August was marked by a noticeable increase in Ukraine fatigue amongst Kyiv’s western partners. With the US presidential elections looming and Ukraine turning into an insatiable money pit, patience with the war is beginning to fade. A major military victory would go a long way towards shoring up support for Kyiv as the war is increasingly expected to spill over into another year.