Russian politics was thrown into chaos after Russian President Vladimir Putin introduced a partial mobilisation on September 21, calling up 300,000 reservists to fight in Ukraine. Within a week almost the same number, 260,000, men of military age had fled the country.

This is a seriously risky move by Putin as it threatens to break his famous social contract with the people: you don’t interfere with politics; we won’t interfere with your daily lives. Putin was trying to find a balance in this equation as 300,000 men is 2% of the population, moreover, the bulk of the recruits were drawn from the poorest ethnic minority regions in the centre of the country that are completely under the control of the state. The European part of the country where most of the Slavs live were much less molested. IN this way the daily lives of the majority of the population – more than 99% in the European parts – remain the same.

What protests there were were limited to the target regions like Dagestan and those in Moscow and St Petersburg ran to around 500 people and were easily repressed by the OMON.

However, Putin is gambling, but with the front in Donbas in collapse he has shown himself unwilling to back down and will go to any lengths to obtain his goals. In this sense the talk of the possible use of nuclear weapons should be taken seriously.

Accompanied with the mobilisation was referenda in four Ukrainian regions which is highly like to end with their annexation in October. This changes the narrative in the fighting in Ukraine. Unitl now Ukrainian forces have been firing at Russian troops that are on a special military operation to protect the locals from “Nazis.” After annexation that narrative becomes Nato-backed Ukrainian forces attacking Russian sovereign territory and as such significantly increases the risks of a boarded conflict directly between Russia and Nato.

The economy on the other hand continues to do much better than expected. Russia has passed the most difficult situation in the economy, President Vladimir Putin said at a plenary session of the Eastern Economic Forum (EEF) on September 7. "I would like to note, we believe, our experts both in the government and the presidential administration believe that the peak, the most difficult situation [in the country’s economy] has been passed. The situation is normalizing, which is highlighted by macroeconomic indicators as well," he said. The authorities will continue efforts to defeat inflation, Putin added. "At least everything will be done for that," he noted.

According to Rosstat's detailed estimate, Russia's GDP fell by 4.1% year-on-year in the second quarter of the year. In the first quarter, annual growth was still 3.5%. The Russian economy expanded slightly in July–August, analysts of the central bank’s research and forecasting department said in a report late on September 7.

Russian President Vladimir Putin gave the most optimistic forecast for this year’s economic performance of any government yet, saying that there will be no budget deficit and that economic contraction will be no more than 2.5% on September 7.

Much has been written in September about the evaporating budget surplus, but this comes as no surprise and was in the plan since April. Oil and gas revenues have fallen dramatically, and oil revenues are expected to halve by the end of the year.

Nevertheless, Russia’s booming current account surpluses are expected to continue both this year and next. The latest Consensus Economics survey of major forecasts finds an average current account surplus of $196bn this year and $124bn next year. The Central Bank of Russia expects the current account surplus to hit $243bn this year and $125bn next year. The CBR preliminarily puts the current account surplus for the first seven months of this year at $167bn dollars. All of those numbers are records compared to the pre-war period.

Russia is on course to have a 2% of GDP budget deficit but that can easily be covered by the money in Ministry of Finance (MinFin) treasury account, money in the National Welfare Fund (NWF) and borrowing from the banks on the domestic ruble bond market. In addition the Central Bank of Russia (CBR) can print money to fund any short fall going forward as the tight capital controls will allow it to shelter the economy from run away inflation for some time to come.

The West is responding to the looming annexation of the Donbas and other regions with an eight round of sanctions that will take a step closer to imposing an oil price cap scheme, but implementing it full.

However, the sanctions possibilities have run their course as they are now inflicting as much, or more, damage on the western economies as they do Russia. The failure to launch a functioning oil price cap mechanism is on example. The exclusion of diamond trading from the eight package is another as it is too important to Antwerp and the Belgian economy. And the eight round also included the easing of some sanctions on commodities like coal, cement and fertilisers that the EU cannot still source elsewhere.

On the flip side Putin continues to wage an effective economic war agains the West. Restricting gas supplies have effectively caused an energy crisis in the West and that has forced governments to spend around halt a trillion euros on relief and support. Energy intensive industries across Europe are already shutting down or reducing production as they have become economically unviable and the beginnings of social protests at the pain of the economic war has begun. How far these trends go remains to be seen.

The energy crisis is likely to get worse. Gazprom began reducing the flows through Nord Stream 1 in June, but it appears that Russia blew the pipeline up at the end of September cutting off even the possibility of more gas deliveries for the rest of the winter. If the weather is mild in the next six months with the gas storage tanks 90% full as of the start of October, Europe probably has enough gas to get to the end of the heating season. However, without Russian gas it will be difficult to refill the tanks over the summer and Europe will very likely face another energy crisis next winter as well with the same trillion euro-plus costs.

All of this will push Russia and the rest of Europe into a deep recession next year that will only add to the pain.