Russia’s economy grew by 0.8% in the second quarter quarter-on-quarter, with overheating persisting so far, according to the Central Bank’s bulletin "What Trends Say".

"Due to active growth in May-June seasonally-adjusted GDP in the second quarter increased by 0.8% compared with the first quarter, according to our estimate. Such economic expansion coupled with an increase in price growth points at least to persisting economic overheating," the regulator’s analysts said.

But inflation remains the main problem fuelled by an overheating economy and jobless rate at a record low of 2.6%.

Russia faced its seventh straight month of price growth, in July as inflation touched on
9%, but is expected to peak at this level and fall to about 7% by the end of
the year.

CBR delivered a bumper 200bp hike to 18% on July 26, and leaves door open for further tightening. Analysts say there will be no cuts this year and there could be another 50bp hike in August.

The Russian economy continues to be in a state of overheating. The current price growth slowed down somewhat in June, but inflation pressure remains high, the Central Bank states.

The main pro-inflationary factor is high domestic demand, which continues to grow at a rate exceeding the current capabilities of the economy with high economic and credit activity, the Central Bank writes.

The growth outlook for this year was increased from 2.8% to 3.4-3.5% in July, only slightly less than 2023 rate of 3.6%. However, recent studies show that 15 percent to 45 percent of Russian emigrants have returned to Russia, and the process is expected to continue, prompting speculation that Russia is gradually reversing its brain drain following the 2022 migration crisis.

Current transformation of the Russian economy is a marathon race with barriers and not a short distance, Governor of the Bank of Russia Elvira Nabiullina said.

"We have recovered quickly, quicker than we expected ourselves, than expected by many. Growth rates are very high in 2023. Growth rates are high now and certainly, everybody wants to keep them. However, it seems to me that it is important for us to comprehend the current situation and understand that this is a long-distance run. This is not a short run but indeed a marathon distance, and furthermore, across the country and with barriers. We therefore need to estimate forces and understand how we work with constraints," she said.

However, as factories are essentially running at full capacity and human capital resources have been exhausted the economy may slow in 2025. In addition, a generous mortgage subsidy programme has been ended that will put a sharp break on growth. The CBR hiked rates sharply in July, but as inflation is not being caused by monetary problems, it seems the Kremlin is attempting to cool the economy by non-monetary means and has targeted the real estate sector instead.

THE CBR also upped the inflation forecast to 6.5% for 2024 (+1 p.p. compared to May figures) and to 4.5% for 2025 (+0.3 p.p.). Analysts expect inflation to return to the target 4% in 2026 and to remain at this level further on.

Moreover, analysts expect unemployment to go down to 2.6% in 2024 (-0.2 p.p.), up to 2.8% in 2025 (-0.2 p.p.) and return to the level of 2023 of 3% further on.

The price of Brent crude oil is expected at $84 per barrel on average in 2024. Further on the price will decline and equal $80 per barrel in 2025 and $75 per barrel in 2026-2027 (outlook unchanged).

High oil prices also mean the current account surplus will come in around $90bn in 2024, up from $51bn in 2023.

The petrodollars are flowing into the budget and deficit was a modest 0.5% in July, with the full year forecast for 0.8% on target and much less than 2023 end of year result of 1.9% of GDP.

On the ground, real incomes are rising strongly as nominal wages are rising much faster than inflation. Data from the World Bank show that Russians earned $14,250 per person last year in gross national income per capita. "Economic activity in Russia was affected by a significant increase in military activity in 2023," the bank's report says.

Real wages have grown by almost 14% this year, and the consumption of goods and services by around 25%, according to Rosstat. A further bump in real wages of up to 3.5% is expected this year, alongside an expected 3% jump in real disposable income, according to Russia’s Center for Macroeconomic Analysis and Short-Term Forecasting.

With cash in their pockets and foreign travel difficult and expensive, Russian have gone on a shopping spree, with domestic tourism being the number one expenditure item and restaurants and cafes doing a booming business. Muscovites say the town is alive and war in Ukraine is having little impact on daily life.

The feel-good factor has pushing Putin’s approval rating above 80% and the majority of Russians believe that the country is going in the “right direction.” The UN upped Russia’s standing to “high income country” in July as a result of the rising wages and economic growth.

The war is going Russia’s way too. The six months hiatus in US support left Ukraine’s energy infrastructure undefended and Russian missiles have destroyed 90% of the non-nuclear installed capacity - about half the total.

Russian forces have been making modest advances along the entire front line, but thanks to the swarms of Ukrainian drones have not been able to make a decisive break through. However, as Ukraine is suffering from the lack of men, money and materiel time is on Russia’s side and Russian President Vladimir Putin is happy to continue his war of attrition.

The calls for a negotiated ceasefire were rising in volume in July and Ukrainian President Volodymyr Zelenskiy has called for a second peace summit in November to follow on from the failed Swiss peace summit held on June 16-17. A deal will be difficult to do as Putin will demand concessions of territory and Zelenskiy will likely refuse, but the start of talks would be welcome.