Russia’s economy has turned the corner and the “the worst is over” Prime Minister Mikhail Mishustin said at a conference at the end of September, predicting that this growth would be a healthy 2.8%, boosted by massive government spending on the war.

The Russian government has approved its first full wartime budget that will significantly increase military spending in 2024 as well as boost social spending to shelter the population from the effects of war and sanctions.

Russia’s 2024 budget will see spending on defence overtake social spending for the first to hit RUB10.8 trillion($112bn), or 6% of GDP as Russian President Vladimir Putin goes all in on the war and clearly expects it to last a long time. That is triple what Ukraine is spending and raising more money appears to becoming more problematic as Ukraine fatigue sets in in the West.

Long-term the economic distortions from the war – the state is now driving growth, not the private sector – will probably lead to long-term stagnation, but in the short-term Russia is one of the best performing economies in Europe where the cost of the polycrisis is increasingly weighing on European economies, and Germany in particularly. The number of company bankruptcies in EU countries in the second quarter of 2023 has reached the highest level since 2015, when they started collecting data

And after a disastrous start to the year following the imposition of the G7 twin oil sanctions on Russian crude and oil products exports, as Russian Finance Minister Anton Siluanov predicted, oil revenues are starting to recover. Some 70% of Russian oil exports are now operating outside of the sanctions regime, and following OPEC+ production cuts that have been extended to the new year oil prices are approaching $100 per barrel. That means the Russian budget deficit is set to come in at “2% or less” according to Siluanov.

With RUB6.8 trillion in the liquid part of the National Welfare Fund (NWF), Ministry of Finance (MinFin) three-times more cash than it needed to cover this year’s projected RUB2.9 trillion deficit, but now with petrodollars accumulating in the Kremlin’s coffers, it has even more money to run the country.

The one problem the managers still face is inflation is now rising and will be hard to contain. Inflation topped 5% in July and in addition to an emergency rate hike of 350bp to 12% the Central Bank of Russia (CBR) put through in August to stop a meltdown, and another 100bp hike a month later, inflation is expected to keep climbing for the rest of the year. CBR governor Elvia Nabiullina is sticking to her long-term target rate of 4%, but whereas that goal was supposed to be met next year, now the 4% rate will not be hit until 2025 at the very earliest. The CBR will have to keep rates high in 2024 and 2025 and growth will slow as a result.

Indeed, one of the main problems with the 2024 budget is it contains a very optimistic forecast of low inflation of 4.5% in 2024, which economists do not find creditable.

But on-the-ground things still feel pretty good. Russia’s manufacturing PMI for September was the highest in five years as business is booming, even if exports are down. Russia’s industrial production and retail sales data for August suggest that activity remained fairly solid and Capital Economics thinks the economy is on track for GDP growth of 2.5% this year.

The negative impact of sanctions on trade are also being unwound as companies and traders work out new logistical routes to connect Russia to the international market.

Russia’s goods trade balance still showed a surplus in January-August. In contrast, the services trade deficit doubled due to high growth in tourism imports. While the net capital outflow from Russia continues, it is more modest than last year’s record levels. Capital flight was a serious problem in 2022 when more than $250bn left the country, but the ever vilgilent CBR has been cracking down on the schemes and year to date only $27bn has left the country.

Recent reports show that the war in Ukraine has come to an almost complete standstill, with the much vaunted counteroffensive failing to break through Russia’s defences. Ukraine has taken almost no new territory while Russia has settled into defensive stance and is simply wearing the Armed Forces of Ukraine (AFU) down.

While the Kremlin pays lip service to the possibility of peace talks, analysts widely agree that the Kremlin will wait for the results of the US presidential elections in November next year before the possibility of talks becomes real again.